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centre for advanced engineering  •  christchurch  •  new zealand
The Contract in Successful
Project Management
Innovations in Contract Forms & Dispute Prevention and Resolution
Ernesto Henriod & Jason Le Masurier
EDITORS
ISBN 0-908993-30-7
Printing History
First published September 2002
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of the Centre for Advanced Engineering.
Copyright
© 2002 Centre for Advanced Engineering
Publisher
Centre for Advanced Engineering
University of Canterbury
Private Bag 4800
Christchurch
New Zealand
Editorial Services, Graphics and Book Design
Charles Hendtlass, Centre for Advanced Engineering
Printing
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Cover Design
Hudson Design, Christchurch
Disclaimer
It will be noted that the authorship of this document has been attributed to the many individuals and organisations
who have been involved in its production. While all sections have been subject to review and final editing, the
opinions expressed remain those of the authors responsible and do not necessarily reflect the views of the Centre
for Advanced Engineering.
Based on papers presented at the CAE Conference “The Contract in Successful Project
Management: Innovations in Contract Forms & Dispute Prevention and Resolution”
held at Christchurch, New Zealand, on 17-19 February 2002
iii
David Elms
Foreword
David Elms, CAE
1 Blockley, D I and Godfey, P (2000) Doing it Differently: Systems for Rethinking Construction. Thomas Telford,
London.
2 Department of the Environment, Transport and Regions (1998) Rethinking Construction. London.
The reason for this book is simply that the nature of project-oriented contracts
has been evolving in recent times, and newer and more cost-effective approaches
have been developed. They can offer significant advantages over traditional forms,
but have not yet been widely used within New Zealand and the broader region of
Oceania and Asia. The book aims to show what is going on in different parts of
the world. It deals with advantages and disadvantages, and gives historical and
philosophical backgrounds to show the sources of ideas.
There is a sense in which this book is a shop window. It shows a range of new
forms of contract and of methods of managing the relationships between contractors
and clients. Though it cannot be totally inclusive, it deals with the major innovative
approaches. Many readers will know about some, but most will not know all.
There is a big step between simply knowing about a new form of contract or
approach and understanding how and where it can best be used. The book
discusses and explores the pros and cons, the different forms, and where they are
best suited. The contract form must be matched to its context. Moreover, the
context is wider than just the nature of a particular project. Legal frameworks and
insurance attitudes will also set limits on what can be done. These issues must
be understood before the user can have a rich picture of the possibilities. It is
important to see the whole picture and not just the separate parts, and so
understand how the different approaches relate to each other. It is also helpful to
get a better understanding of the obstacles preventing ready uptake of new
approaches. For instance, there is an underlying conservatism in the construction
industry. Its fragmented nature tends to make players risk averse, seeking the
protection and comfort of known methods rather than looking for opportunity.
CAE became involved when it was pointed out there was a need in the construction
industry. New approaches to project contracts were being increasingly used
internationally because they led to more cost-effective results and also to greater
efficiency in project performance. “The development of ‘relationship-based’ contracts
such as partnering, designed to motivate joint success on an open book, risk and
reward basis, has enabled substantial performance and cost improvements to be
achieved, particularly in offshore oil and gas industry”.1 Again, “UK construction
appears to be already achieving productivity gains of 5% a year. Some of the best
UK and US projects demonstrate increases equivalent to 10%-15% a year”.2 Though
it makes great economic sense for clients and contractors to improve their efficiency,
iv
Foreword
3 Elms, D G (ed)  (1998) Owning the Future: Integrated Risk Management Principles and Practice. CAE,
Christchurch, New Zealand.
4 Small, F C (2000) Ministerial Inquiry into INCIS. Ministry of Justice, Wellington, New Zealand.
it is also significant from a national point of view. The point is made later in the
book that the construction industry in New Zealand represents about 15% of GDP,
so a 5% improvement would mean a substantial gain.
A second reason for CAE involvement is that there is a close relationship between
risk management and project contracts, so the topic fits into CAE’s broader risk
management programme.
Risk management can be thought of as primarily a process of controlling and
managing uncertainty.3 Drawing up a contract and assessing risk are both concerned
with what will happen in the future, which necessarily involves uncertainty. Both
deal with decisions to be made in the present relating to the future, and the
precise nature of the future events will be unknown. A good way to look at the
nature of newer forms of contract is therefore to use the analogy with risk
management to tease out ideas, possibilities and questions. Before we do so,
note that risk management in an organisation is ideally focused more on opportunity
rather than on protection. It is managing with risk – of knowing how to go ahead
while accepting uncertainty – rather than a management of risk, which implies
minimising risk rather than maximising opportunity. The same is true for a contract,
except that now there are two parties involved, which brings in the additional
issue of how the risk, for better or worse, is shared between the two.
So therefore, as CAE is interested in promoting good practice in risk management
in all its forms, it is interested in promoting newer and more effective forms of
project contracts and their management.
Uncertainty takes many forms, and has many sources and degrees. Ideally, the
form of contract should not only deal with uncertainty, but should also be tailored
to the precise form of uncertainty that arises in a particular project.
For example, the INCIS project of the New Zealand Police was an IT project where
there was a high degree of uncertainty. The uncertainty was partly to do with the
very high rate of change of IT technology during the course of the project, but it
also arose from changes in aims and changes in governance as the project
proceeded. The project did not achieve its original objectives, and the subsequent
Ministerial Inquiry questioned whether the form of contract used was appropriate
for the high degree of uncertainty inherent in the process.4 There was a mismatch
between form and need.
There are many sources of uncertainty in projects. Some are
• Changing technology. The INCIS project is a good example of where fast-changing
technologies lead to high uncertainty.
vDavid Elms
5 Blockley, D I and Godfey, P (2000) Doing it Differently: Systems for Rethinking Construction. Thomas Telford,
London.
• Complexity. The greater the complexity of a project, the greater the likelihood of
unexpected and counter-intuitive occurrences. The more complex the situation,
the less easy it is to describe it and predict its outcomes with any precision.
• Changing information. For almost all projects it is not possible to know all the
relevant information from the beginning, but for some the degree of uncertainty
is very large. Work involving foundations or soil behaviour is a case in point.
This led to the development of the Observational Method, which is essentially
a design-as-you go approach. It is sensible and effective, but it is seldom used,
firstly because it does not fit well with traditional forms of contract, and secondly
because clients have not liked to proceed with a project facing a high degree of
cost uncertainty. They would prefer to buy certainty by pushing the risk on to
the contractor, at a cost.
• Changing requirements and understanding. A client’s requirements may change
during the course of a project with increased understanding of its possibilities,
and also through changes in personnel. To some degree this is inevitable for
every project. But traditional forms of contract are based on the fiction that
change does not happen. There is a desperate grasping for certainty.
• Inexperience. A further source of uncertainty lies in inexperience. It might be
inexperience in a design or construction team, but it might equally well be
inexperience arising from new materials or new methods of design, construction
or management.
There are other aspects of uncertainty. Factual uncertainty, for instance, can be
contrasted with financial uncertainty. Moreover, the two are not independent. It
might be appropriate to accept greater uncertainty in the expectation that, overall,
the cost will be lower and the effectiveness of the project will be improved. The
main point, though, is that a project will always have an environment of uncertainty.
It is crucial to match the form of contract to the uncertainty-environment of the
project.
So far we have talked of uncertainty rather than risk as a whole, which involves
both uncertainty and costs (or benefits).
A key aspect of contract risk is the way in which the risks in a project are to be
divided between client and contractor. The right balance must be found. It is
seldom sensible to try to put all the risk on one party. It is certainly not appropriate
either, to try to hide the risks or to assume they do not exist. Some forms of
contract might have clauses that quite inappropriately leave one party liable,
even to the extent of increasing the total risk to the project.
Every project is a process, and it is important that the contract should recognise
this. The process view of projects is the central theme of a significant recent book
on the construction industry.5 The book responds to a major review of the
vi
Foreword
6 Department of the Environment, Transport and Regions (1998) Rethinking Construction. London.
7 Edwards, C (1904), The Hammurabi Code and the Sinaitic Legislation, with a complete translation of the great
Babylonian inscription discovered at Susa. Watts, London.
construction industry mounted by the British government.6 Newer forms of contract
are generally much better at recognising the process nature of a project, and in
fact they can sometimes be seen as management processes rather than contracts
in a traditional sense. Blockley and Godfrey take a systems approach, which is
scarcely surprising as it could be argued that all substantial risk management
exercises must be based on a system framework.
This is no place to explore the characteristics of processes in detail. I make one
point only, that an essential part of any process is feedback. Even the simplest
tasks are impossible without feedback of some sort. I cannot move a book from
one point on a desk to another without seeing or feeling or hearing what I am
doing. I need to know I am holding it, I need to see that it has reached the
intended place, and I need to feel that it has left my hand.
The analogy with contracts is that if they are to have a part in controlling the
course and process of a project, then they must contain elements of feedback.
Thus incentives or penalties related to performance are important. There are
many types of incentive, and these are best related to the specific nature of the
project. For example, performance-based contracts for highway maintenance might
include rent payable by the contractor for occupying the highway – a strong
incentive for completing the job quickly.
In its eleven chapters the book progresses from background ideas through
descriptions of newer forms of contract to, finally, practical details such as dispute
resolution. Chapter 1 argues that there are deep set cultural problems reducing
the effectiveness of the construction industry, but that the new contract forms
contain two major currents of change. They are a change from an adversarial to a
collaborative culture, and changes in the underlying form of contracts. I would
add a third reason for change, which is that the development of modern methods
for quantifying and formally specifying uncertainty can make for greater transparency
of risk sharing in contracts.
Chapter 2 shows that there are fundamental problems of compatibility between
the law (and its tacit cultural assumptions) and the needs and intent of contracts.
It could even perhaps be said that good law is incompatible with good contract
outcomes. The newer contract approaches have the ability to transcend the law.
Chapter 3 gives some history and show the great changes that have taken place
between Hammurabi’s ancient code7 and the NEC, representing the most modern
forms. (Hammurabi focused on draconian penalties for non-performance, which
we can assume led to inevitable inefficiencies in Assyrian building practice). Chapter
4 reviews risk management, and gives a rough taxonomy to help understanding.
The next three chapters deal specifically with the FIDIC New Suite, the NEC and
vii
David Elms
NZS 3910. Chapter 8 discusses the culture change to collaborative working
approaches such as partnering, with the benefits given as timely completion, cost
predictability and job satisfaction. Chapter 9 deals with neutrals as part of the
contract, which is common to all the new forms. Chapter 10 talks about causes of
contract failure and gives stories of human failure. Finally, Chapter 11 deals with
dispute resolution, if disputes should ever occur. The expectation is that with the
new forms, disputes would be rare, and this indeed seems to be the case.
viii
Foreword
ix
Acknowledgements
The Centre for Advanced Engineering (CAE) wishes to acknowledge the collaboration
of the Arbitrators’ and Mediators’ Institution New Zealand (AMINZ), the Institution
of Professional Engineers New Zealand (IPENZ), and the Project Management
Institution New Zealand (PMINZ) in the preparation and presentation of the
Conference from which the papers and notes that follow have been assembled.
Particular thanks are due to Penny Mudford, CEO of AMINZ, Iain Fraser, Fellow and
Director (Asia/Pacific) of PMI, John Gardiner, Manager Engineering Practice IPENZ,
and Bill Stockman, Executive Director Arrow International for their encouragement
to CAE in organising the Conference.
We also thank our two Peer Reviewers: John Burrows who, not content with
presenting one of the key papers in the Conference, accepted the task of reviewing
the book from a contract law perspective and Ron Holbrook who gave us the
benefit of his technical and project management expertise when reading through
the papers and providing us with his valuable comments.
Special thanks are due to all our keynote speakers and those who actively took
part in the discussions and enriched the content of the Conference for the benefit
of all who took part and — we hope — all who enjoy reading and applying the
lessons contained in this book.
Finally, we would like to acknowledge the extensive contribution of Charles
Hendtlass who has so ably managed the production and publication of the book.
In Appendix B you will find descriptions of all the institutions mentioned in the
first paragraph.
Ernesto Henriod
Jason Le Masurier
x
xi
Contents
Foreword ............................................................................................................ i
Acknowledgements ......................................................................................... ix
1 Introduction ................................................................................................. 1
Ernesto Henriod
2 The Principles of the Law of Contract ...................................................... 5
John Burrows
3 Evolution of the Engineering Contract ................................................... 21
Ernesto Henriod
4 Risk Management ..................................................................................... 31
Nael Bunni, Jason Le Masurier & Patrick Tuohey
5 The New Suite of FIDIC Conditions of Contract:
Significant Changes ................................................................................. 61
Nael Bunni
6 A New Approach — the New Engineering Contract .............................. 83
Martin Barnes
7 The New Zealand Standard Conditions of Contract .............................. 91
Suzanne Wilkinson
8 New Opportunities through Culture Change ....................................... 109
compiled by Jason Le Masurier
9 Preventing and Resolving Disputes: the Role of the Neutral ............. 157
Gay Pavelka, Ernesto Henriod & Frank McDonough
10 The Causes of Contract Failure ............................................................. 175
Derek Firth & Ernesto Henriod
11 The Resolution of Disputes ................................................................... 199
Ian Barker, Nael Bunni & David Williams
12 Conclusions ............................................................................................ 247
Jason Le Masurier
Appendix A .............................................................................................. 255
The World Bank: Points of View and Issues — Armando Araujo ............................. 257
The Asian Development Bank — Ross Clendon ..................................................... 261
Contracts and Project Management in China — Lu Youjie & Tan Wee Teck .......... 265
Construction Joint Ventures in Asia — Lu Youjie & Tan Wee Teck ......................... 279
Worley’s Project Risk Management — Patrick Tuohey ............................................ 291
Appendix B .............................................................................................. 297
Contributors to the book ........................................................................................... 299
Supporting organisations ......................................................................................... 303
Index .............................................................................................................. 305
xii
1Ernesto  Henriod
The key objectives of any contract are to achieve the required output, at the
agreed time, and within budget. The failure to achieve one or more of these
objectives is a basic contract risk. Not all these risks can be foreseen and assigned
to the parties by the contract; nor are they engineering, physical or financial risks
usually covered by insurance. Contract failure cannot be measured or described
mathematically or assigned to clever computer models. It arises, first, from the
basic documents that govern the human relationships involved in managing a
contract, and second, from the general culture medium for the engineering industry
in which the contract must be managed.
Since the onset of the modern construction contract, which emerged from the
Industrial Revolution and the great engineers of the time — the Brunels, Smeatons,
Stephensons and Watts of the 19th century — the contract forms used in engineering
had been gathering legal wordage, increasing in complexity, filling up with
demanding language, and becoming couched in terms that fostered adversarial
relationships among the parties. The culture of confrontation was one of the
dominant features of the construction industry over the better part of two centuries.
The only winners in the traditional contracting game were those who could interpret
the complex contracts to their own advantage, or those who lived on the fringes
of engineering but reaped the fruits of the culture of disputology .1
The culture of “them and us” was perhaps deeply rooted in the legal systems and
civil rules and procedures, which are currently undergoing dramatic changes in
the UK. To quote the Hon Mr Justice Hartmann2, “The old spirit was more of a
warrior code, the tactics of combat dictated by which side you represented. That
has been fine, no doubt, for those initiated into the code, the civil litigation
lawyers. But Lord Woolf 3 found that litigants were, in the main, not satisfied with
the system. They criticized it for being too slow and far too uncertain, too expensive,
incomprehensible to the uninitiated and too susceptible to abuse.”
Many great and smaller projects reached completion and achieved their quality,
time and cost goals: for instance, in the 1960s, Mangla Dam in Pakistan achieved
all this in an environment of close collaboration among all the parties to the
contract: client, consultant, contractor and financier. This was no mean achievement
for a US$500 million dollar contract, at the time the largest contract ever financed
1 IntroductionErnesto Henriod
1 Disputology: a term coined by the late Sir Michael Kerr when giving the Keating lecture in 1996.  It describes
the business of, on the one hand, creating opportunities for disputes and, on the other hand, attending to
their resolution.
2 “East greets West—new opportunities for dispute resolution”.  The Hon Justice Michael Hartmann, Judge of
the High Court of Hong Kong.  Asian Dispute Review, May 2002.
3 The Lord Chief Justice.
2Introduction
by the World Bank. However, the 1960s and 1970s also saw many disastrous
contracts — typified by the Kariba Stage 2 contract, and the demise of a major
British contractor. By and large, the construction industry had acquired a bad
name. Huge increases in cost, delays in completion, crippling strikes, failed
contractors and contract abandonment were all too common, and had a heavy
cost for the whole economy.
Could the responsibility for the poor performance of the industry be pinned on to
one particular participant or stakeholder in the sector? Not really — the culture of
suspicion, confrontation and abuse affected all sides:
• the owners, who felt exposed to abusive charges, and sought to protect
themselves, first, by awarding contracts to the lowest bidder, often with little
regard to qualifications, and then by insisting on tight and demanding conditions
of contract. In some cases, governments, as the owners, refrained from employing
contractors and resorted to their own forces — this was almost a blind alley for
civil engineering in New Zealand where, until the 1990s, most heavy civil
construction work was carried out by the Ministry of Works, thwarting the
development of a domestic competitive civil construction capability.
• their consultants (project designers and contract supervisors) who did not always
behave in the impartial and altruistic fashion expected of the engineer or the
architect, and occasionally were seen to follow courses of action to protect their
own interests, or blatantly side with the owners.
• the contractors, who found themselves pinned down by crippling price
competition and by the exigencies of owners and consultants, while trying to
make a profit. The survivors resorted to looking for loopholes in contracts and
specifications, creating opportunities for pricing claims and variations and
introducing quality shortcuts, forming pricing clubs, and squeezing their
supporting subcontractors and suppliers. Many resorted to the expedient of
low pricing to maintain an inflow of tendered work; moneys from the new
contracts would plug the financial holes of the previous work, until the chain
broke down.
• Finally, the financiers, who focused on the recovery of their principal and interest,
applied financial stringencies on owners and contractors, increasing collateral
requirements or slowing cash flows. Delays in payments eventually led to cost
over-runs, or failures. This was particularly true in government-financed work —
and it is still a problem in developing countries.
Poor performance by the construction sector is intolerable for any country.  Its
economic significance is highlighted by statistical figures from the World Bank
that show that between 30% and 60% of the gross domestic fixed capital formation
is contributed by construction. In New Zealand, it is estimated that the construction
sector contributes upwards of 15% to the GDP.
However, the last decade of the 20th century witnessed a revolution in the
3Ernesto  Henriod
management of the risk of contract failure.
The construction industry and the learned institutions grouping consultants and
engineers involved in the industry realised that reform was necessary, to bring a
constructive, collaborative attitude and an environment incorporating all the
participants. By the mid 1980s, an inspired group of professionals, under the
umbrella of the Institution of Civil Engineers (ICE) in London, started work on a
new approach at contract drafting, looking for simpler, clearer forms, showing a
fair allocation of risk, and incorporating processes to simplify contract management
on the basis of solid logic and communications. At about the same time, on the
US West Coast, contracts for excavation of highway tunnels, long plagued by
disputes and work disruption, saw the introduction of a ‘neutral’, as an integral
participant in the contract, there to prevent disputes if possible, and resolve them
if they arose.
Those were two great currents of change. These led, on the one hand, to the
emergence of the Disputes Review Boards4 and the formal incorporation of neutrals
in contracts — later adopted more generally under various guises: the Adjudicators,
Neutrals and Dispute Adjudication Boards now used in various forms of contract.
On the other hand, reform currents led to the issue of the New Engineering
Contract of the ICE in 1993, hailed as the first true reform of the Contract since the
1800s.
The realisation that excellent results were attainable through collaboration between
the parties, fair sharing of contract risk, and the prevention or amicable resolution
of disputes led, in turn, to the resurgence of approaches that had been tried in
the past but had largely been dormant: partnering, observational method, target
cost contracts, privately-financed infrastructure projects (the ‘BOT family’ ) and
design-build, for example. The new contract culture has thus resulted in approaches
applicable where mutual respect and trust are present.
Our Conference
The Centre for Advanced Engineering of New Zealand (CAE) undertook to bring
the new currents and developments in contracting under review in a major
conference staged in Christchurch in February 2002, with the collaboration of the
Institution of Professional Engineers NZ (IPENZ), the Arbitrators and Mediators
Institute New Zealand (AMINZ), and the Project Management Institute NZ (PMINZ).
A group of distinguished international and NZ speakers presented substantive
papers to an audience of engineers, project managers, lawyers, arbitrators and
contract experts.
In this book we present the conference papers as read by their authors, or edited
into chapters that bring together various contributions, as well as additional
information available after the event. The aim is to give the reader a well-rounded
4 The Disputes Review Boards have been formalised and become an accepted and well-tried contract devise.
The name has recently been modified by the DRB Foundation, to “Disputes Resolution Boards”.
4Introduction
background of the process of reform, starting with the legal background, describing
and commenting on the existing and new forms of contract, the new approaches
to contracting, and the means for preventing and resolving disputes. The reader’s
attention is also drawn to contract failure and the consequences of escalating
disputes to arbitration or the courts of law. This is perhaps a ‘carrot and stick’
scenario: thou shalt manage your contract properly, or thou shalt be condemned
to disputing a case in arbitration or in the courts of justice!
Brief descriptions of the institutions that supported the conference, and summary
biographies of the authors of the papers, are given in Appendix B.
5John Burrows
Abstract
The common law of contract — indeed any law of contract — has its limitations in regulating
the construction industry, including:
• First, a contract is created by agreement between the parties to it, and binds only them.
The law of contract has thus not been a satisfactory vehicle for regulating the tender
process, or the relations between owner and subcontractor. The interventions of the
non-contractual tort of negligence have been erratic.
• Second, the common law requirement of consideration has impeded the ability of the
parties to vary a contract once made.
• Third, the law of contract does not always cope well with unanticipated changes of
circumstance during performance. The losses caused by all but the most cataclysmic
changes of circumstance lie where they fall unless the contract provides otherwise. Nor
have the common law courts been sympathetic to open-ended clauses, particularly
those providing for future agreement or negotiation between the parties. Unlike some
other legal systems the common law has traditionally not recognised an obligation of
good faith in negotiation or performance. Bluntly put, if the parties have failed to
provide for something in their contract the law will not do it for them.
• Fourth, it is probably not unfair to say that the common law courts have in the past
taken an exceedingly literal approach to interpretation, and have been accused of arriving
at results out of line with commercial reality. And, finally, the remedies known to the
common law are very limited: monetary damages and termination are the main ones.
Some of these deficiencies can be put right by careful contract drafting; some cannot. The
main forms of forms of construction contract — ICE, JCT, FIDIC, and the rest — are well
known. They fulfil several functions. One is obviously to set out the fundamental obligations
of the parties. Another is to fill the above holes in the common law: where the risk of
unexpected impediments is to lie; how variations are to be dealt with; the provision of
additional remedies, such as suspension; and default mechanisms if the parties cannot
agree. All these involve policy rather than legal decisions on which different minds may
differ, and the different contracts do it in different ways. The law’s tendency to literalism
has led to attempts to spell these things out in considerable detail and in many words. But
such is the variety of commercial life that no-one could ever hope to foresee and provide
for everything, so whatever the level of detail, cases will always arise where the contract
does not provide a clear answer, and ingenuity can always find, or create, ambiguity. So
over time the contract will be amended to plug the gaps that have been found in it. This
can lead to the document growing like Topsy and, quite often, the creation of new
uncertainties.
2 The Principles of theLaw of Contract
John Burrows
6The Principles of the Law of Contract
Contracts, which must try to achieve certainty and allocation of risk by telescoping the
future into the present, can never do a perfect job.
There are recent signs that the common law is becoming more flexible on some fundamental
matters. There is a call for interpretation which emphasises commercial sense and purpose
rather than the letter of the document; the courts appear to be getting more tolerant of
agreements to agree; there is even talk of a requirement of good faith. Academics speak of
a theory of “relational” contracting, although it has so far failed to deliver much.
There is a movement towards plain English drafting of contacts. The New Engineering
Contract (NEC) is a remarkably simple document. Recent developments holding considerable
promise seem to me to be those which transcend the law of contract. One is the concept
of partnering which emphasises co-operation, sharing of strategy, and trust, most of which
operates “off contract”. The rapid modern development of alternative dispute resolution
(ADR) offers an opportunity for more flexible, and hopefully amicable, resolution of the
inevitable differences of opinion.
7John Burrows
Introduction
We must not expect too much of the law of contract, particularly in complex
transactions such as those in the construction industry. There are difficulties with
our traditional law of contract, especially the British model. There are signs that
the courts are beginning to sort some of them out, but the pull of tradition is
strong. But however perfect our law of contract is now, or may some day become,
it still cannot be expected to solve all problems that may arise in the course of a
project. Life is too unpredictable.
Some Features of the Law of Contract
The British law of contract, which is the basis for much international dealing in
the construction industry, is a rigid and formal construct created by the courts
and rationalised by the text writers in 19th century England. It has been said by
one judge that the law has “committed itself to a rather technical and schematic
doctrine of contract”.1
Here are some of the problems of the classic law of contract and their effects.
Agreement between the parties
A contract requires an agreement, usually created by offer and acceptance, between
two or more parties. It cannot bind people outside the relationship; a contract is
a sealed compartment. That has several implications.
Firstly, it has given the law a conceptual puzzle in trying to counter abuse of the
tender process. On the traditional view there is only a contract when a tender has
been accepted: a tender is an offer, and the acceptance of the successful tender
seals the contract. Unsuccessful tenderers have no contract with anyone. If an
unsuccessful tenderer complains that the advertised tender process has been
abused by the owner, the law has long found difficulty in finding a legal peg on
which he or she can hang the complaint. At last the courts have come to his or
her aid by inventing a highly artificial ‘process’ contract collateral to the main one.
Its effect is that the call for tenders is sometimes (but not always) an offer that
the advertised process will be followed. It is accepted by anyone submitting a
tender2. That is a strange sort of contract; it would have been tidier to say simply
that the law, quite independently of contract, expects good faith in the tender
process, but we do not have the mechanism for that.
Secondly, the pyramid of contracts in a construction project is complex and unique.
The rule that contracts bind only the parties to them means that subcontractors
are not directly responsible to the principal, and in turn have no recourse against
the principal. Engineers are not directly responsible to contractors or subcontractors.
The problems that the insolvency of contractors can cause to subcontractors are
1 Lord Wilberforce in NZ Shipping Co Ltd v AM Satterthwaite & Co Ltd [1975] AC 154 at 167.
2 See for example Pratt Contractors Ltd v Palmerston North City Council [1995] 1 NZLR 469.
8The Principles of the Law of Contract
devastating and well-known, and have to do with much more than just the
limitations of the law of contract. Only statute can rectify the situation, and New
Zealand is currently making (another) attempt at it3: the last one failed.
Sometimes the tort of negligence, which operates independently of contract, can
intervene to provide remedies for parties outside the contract relationship. But
that has been unpredictable and erratic. In a very few cases subcontractors have
been found liable in tort for negligent work4; contractors can sometimes be liable
to subsequent purchasers of the building5; there is a difference between the UK
and New Zealand as to whether a council and its inspectors can be liable to a
building owner for negligent inspection.6 And the law is showing considerable
timidity in finding professionals such as engineers liable to contractors and
subcontractors for defective design or the specification of unsuitable products.7
All this is because the courts are worried about upsetting the established patterns
of contract and the ‘certainty’ those patterns have engendered in the industry.
That is evident from a recent New Zealand Court of Appeal case where a contractor
sued an engineering company for alleged negligence in preparing a mechanical
services specification that recommended a heating system that did not work. The
majority of the Court of Appeal, dismissing the claim, said:8
“In a comprehensive contractual situation such as existed here, the
Court should be hesitant to go beyond that relationship. A tortious
duty of care outside that framework, but affecting the rights and
liabilities of the various separate parties coming within the very
contractual setting, should not lightly be imposed.”
The futures of contract
The paradigm around which our law of contract developed was the single-event
contract which is made and performed quickly. The law of contract does not cope
so well with long-term contracts which encounter unanticipated changes of
circumstance during their performance. It is of course beyond the wit of a drafter,
and the resources of language, to anticipate and precisely provide in advance for
every eventuality which might happen over future months or years. You cannot
telescope the future into the present and cover all possibilities in a verbal formula.
Yet despite this obvious truism, the law has traditionally been unforgiving when
changes of circumstance do occur. Let me give a few examples.
Firstly, British law regards contract promises as absolute. It will not absolve a
party from performance, nor will it modify an obligation, just because it has
3 The Construction Contracts Bill 2001 - see below.
4 Junior Books Ltd v Veitchi Co Ltd [1983] AC 520.  But the case is not popular; it has been said to be unique,
and not to lay down any general principle: D&F Estates Ltd v Church Commissioners for England [1989] AC 177.
5 At least in New Zealand: Bowen v Paramount Builders (Hamilton) Ltd [1977] 1 NZLR 394.
6 cf Murphy v Brentwood DC [1991] 1 AC 391 (UK) and Invercargill CC v Hamlin [1996] 1 NZLR 513 (NZ).
7 The law dates back to the 1876 case of Thorn v London Corporation (1876) 1 App Cas 120.
8 R M Turton & Co Ltd v Kerslake & Partners [2000] 3 NZLR 406 at 418.
9John Burrows
become more difficult or expensive to perform. It will only absolve from performance
if there has been a totally devastating external occurrence which has made
performance impossible or virtually so. The case books are littered with examples
of builders who have been held to their contracts without relief despite the fact
that site conditions were much more difficult than anticipated; that labour was in
shorter supply; and that prices of material had rocketed.9 Contract is about
allocation of risk, and it is the parties’ job to provide for that in their contract. If
they do not make just provision, the court will not do it for them.
Secondly, if the parties’ contract contains gaps in that they have entirely failed to
provide for a particular contingency, the courts will sometimes imply a term to
deal with it, but only if very stringent conditions are met. The court must be
satisfied that it is simply giving effect to the parties’ obvious but unexpressed
intent. This is a judicial test commonly cited:10
“An unexpressed term can be implied if and only if the court finds
that the parties must have intended that term to form part of their
contract: it is not enough for the court to find that such a term
would have been adopted by the parties as reasonable men if it had
been suggested to them: it must have been a term that went without
saying, a term necessary to give business efficacy to the contract, a
term which, although tacit, formed part of the contract which the
parties made for themselves.”
These two problems have been compounded by the courts’ traditional unwillingness
to allow the parties too much flexibility. The next three examples demonstrate
that.
Thirdly, the doctrine of consideration (which holds that a promise is not enforceable
unless the promisor gets something in return for it) means that agreed variations
of the contract may be unenforceable unless the contract itself provides for them.
Thus, if it emerges during the performance of a contract that the contractor has
quoted too low on an item, a gentlemen’s agreement to raise the price will be of
no legal effect unless the job itself is correspondingly changed: otherwise the
owner is getting nothing in return for his promise to raise the price. Recent
authority has mollified this principle by providing that consideration is present if
the variation results in a practical benefit for both sides11; but some contract
purists have great difficulty accepting this triumph of practical reality over legal
nicety.
Fourthly, the law of contract has traditionally been unwilling to countenance
open-ended contractual terms. So, while there has not been total consistency
9 See Wilkins & Davies Construction Ltd v Geraldine Borough [1958] NZLR 985 and Davis Contractors Ltd v
Fareham UDC [1956] AC 696.
10 Trollope & Colls Ltd v North Western Metropolitan Regional Hospital Board [1973] 1 WLR 601 at 609.
11 Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1.
10
The Principles of the Law of Contract
about this, there is authority that leaving a provision open to further agreement
can be fatal to the existence of any contract at all.12 Thus, a term providing that,
say, the price of an item will be “as agreed from time to time” has sometimes
resulted in a holding that there is presently no contract at all. That is ostensibly
for either of two reasons: that the parties, having acknowledged that there is
more agreeing to do, cannot have intended to be bound yet; or that if the parties
fail to agree, there is no standard by which an adjudicative body can fix the price
for them. Agreements to negotiate terms in good faith have not fared much
better. A member of the House of Lords rationalised it thus:13
“The reason why an agreement to negotiate, like an agreement to
agree, is unenforceable, is simply because it lacks the necessary
certainty...
The concept of a duty to carry on negotiations in good faith is
inherently repugnant to the adversarial position of the parties when
involved in negotiations. Each party to the negotiations is entitled
to pursue his (or her) own interest, so long as he avoids making
misrepresentations. To advance that interest he must be entitled, if
he thinks it appropriate, to threaten to withdraw from further
negotiations...
How is the court to police such an ‘agreement?’ A duty to negotiate
in good faith is as unworkable in practice as it is inherently
inconsistent with the position of a negotiating party.”
Fifthly, the courts have not been much inclined to imply duties of ‘cooperation’. A
court once said that, apart from express terms, “the law can enforce cooperation
only in a limited degree — to the extent that it is necessary to make the contract
workable.”14 Nor has there been much warmth towards the introduction into
British (including New Zealand) law of a doctrine of good faith. Judges have found
the expression difficult to pin down; and I think there may be a suspicion, too, as
to whether in the cauldron of commercialism much reliance can be placed on it.
In respect of both these last two matters, there are recent signs of a change of
attitude. There is now pretty much general acceptance that agreements to agree
should not be automatically struck down, provided there is a fall-back machinery
or an objective standard which can be employed if the ‘agreement to agree’
produces no fruit. But despite this shift in attitude the Court of Appeal recently
found a Heads of Agreement unenforceable simply because it left too much
unsettled.15 There are also some signs that a general doctrine of good faith may
be in the wind, but it still has a long way to go. At least one New Zealand judge,
now retired, has argued strongly for it.16
12 e.g. Barrett v IBC International Ltd [1995] 3 NZLR 170.
13 Walford v Miles [1992] 2 AC 128 at 138 per Lord Ackner.
14 Mona Oil Equipment Co. v Rhodesia Railways Ltd [1949] 2 All E.R. 1014 at 1018 per Devlin J.
15 Electricity Corporation of NZ v Fletcher Challenge Energy Ltd (2001) 7 NZBLC 103, 477.
11
John Burrows
Interpretation
The next problem I shall address is not so much one of the law of contract as
such, but rather one of judicial approach. It relates to the way courts interpret
contracts. In times past there was a tendency for the common law courts (with a
few exceptions) to take a rather literal view of the interpretation of contracts, and
indeed of all sorts of legal document. There could be an over-concentration on
the minutiae of language and grammar, and a failure to place the words in context
and to pay attention to the overall purpose of the contract. It was almost as if
there was a belief that words have one plain meaning, and that you can discern
it by poring over the four corners of the document without so much as raising
your eyes or reflecting on what the contract was trying to achieve. The result, in
construction contracts, has sometimes been decisions which have been divorced
from commercial reality. To use Duncan Wallace’s words, this approach has produced,
in a regrettable number of cases, “results at serious odds with the aim or purpose
of the transaction viewed as a whole”. He instances such examples as the holding
that a certificate of completion exempts the builder from all liability for defects,
even where legal proceedings have been commenced before the certificate; and
the holding that no extension of time could be granted in respect of stage 2 of a
project despite the fact it had started late due to excusable delays in the completion
of stage 1.17 Again, I would emphasise that this kind of outcome was by no
means universal, but there certainly were plenty of examples of it.
This old literal approach is fast disappearing. As recently as 1998 the House of
Lords, in a judgment cited numerous times since, said something must be done
about it.18 Contracts should not be interpreted in a vacuum, but in the light of the
surrounding ‘factual matrix’, and decisions should be arrived at which give effect
to commercial purpose and business common sense. One should not be tripped
up by the narrow literal meaning of words. It is hardly possible to disagree with
that, but it is not without practical problems. To fully understand the ‘factual
matrix’ might require lawyers and judges to be fully informed about practice and
custom in the construction industry. It is a complex industry, and many lawyers,
and I venture to say judges, have little experience of it. It is a big ask to require
that within the narrow confines of the courtroom, constrained by the limitations
of legal argument, they can ever become thoroughly familiar with this complex
subject.
Moreover explanations of the ‘factual matrix’ can undesirably lengthen proceedings,
and there are risks that much of it may be irrelevant to the problem in the case.
These problems have begun to manifest themselves in New Zealand in the four
years since the House of Lords case, and have been the subject of terse comment
in the Court of Appeal.19 It is difficult to have it both ways. One cannot but
16 Thomas J.  See his latest exposition of it in Bobux Marketing Ltd v Raynor Marketing Ltd CA 245/00, 3 Oct
2001.
17 Hudson’s Building Contracts 11th edn 1995 at 117.
18 Investors’ Corporation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98.
19 e.g. Pyne Gould Guinness Ltd v Montgomery Watson (NZ) Ltd CA 28/99, 16 Nov 1999.
12
The Principles of the Law of Contract
welcome the advocacy of a purposive as opposed to a literalist approach, yet one
must acknowledge the difficulties that come with it.
Remedies
The common law knows only two major remedies for breach of contract: monetary
damages and, in the case of substantial breach, cancellation. It also has power, in
some cases where a contract has fallen through, to award restitutionary relief.
Equity supplements this with the injunction (an order not to do something) and
specific performance (an order to perform the contract). These equitable remedies
are effective, but are in the discretion of the court, and are seldom regarded as
appropriate in building contracts.
So at common law the remedies of damages and cancellation are effectively all
there is. They operate in an all-or-nothing fashion; that is a result of the adversary
system. If you win you recover all your damages; if you cancel the contract it is
terminated for good. There are no half measures. Restitutionary relief has grave
limitations at common law too: if a lump sum contract was terminated before
completion the builder got nothing if he was at fault. The common law had no
means of spreading loss; the courts applied all-or-nothing rules rather than
discretion. In New Zealand we have some statutes — in particular the Contractual
Remedies Act 1979 — that depart from that paradigm and allow a court some
discretion to distribute money and property in a fair way, but we are exceptional
in that.
The Standard Forms of Contract
I have outlined some features of the classic law of contract. The well-known
standard forms of construction contract were developed at a time when that
classic law was at its height. It influenced contract drafters in a number of ways:
• It encouraged very detailed drafting, because if the drafter did not put something
in the court would not imply it.
• It required certainty and precision in drafting, because the law did not like
open-endedness.
• It required a lot of words to make sure everything was covered, because what
was written was liable to be narrowly and literally interpreted.
Let us now turn to the standard forms.
Their content
Some of the problems which I have addressed cannot be solved by any sort of
drafting: the rule that contracts do not bind third persons is one; the style of
interpretation is another, because that is a judicial activity which cannot be dictated
by the contracting parties. But the others can be avoided, or mitigated, by careful
13
John Burrows
drafting of the contract, and that is precisely what the law invites. The parties can
provide for their own allocation of the risks of unforeseen events, their own
procedures for dealing with changes in circumstance, and their own remedies.
The common standard forms are well known: the British contracts ICE and JCT;
the big international player FIDIC; and in New Zealand NZSS 623 (now replaced
by NZS 3910) and the Institute of Architects contract. Apart from fixing the
fundamentals like price and time, they provide the sort of detail of which I have
spoken.
Firstly, they all allocate the risk of future uncertain events: weather, price rises
and so on. They tend to use formulae such as “conditions not reasonably
foreseeable by an experienced contractor”. How they allocate those risks, and
who bears the brunt of them, differs from contract to contract. This is not a legal
question, but a policy one which the industry and the contract drafters must sort
out. Whether you agree with the solution depends on which camp you are in.
Duncan Wallace said of the 5th edition of ICE that it moved risk unacceptably
towards the owner. In his inimitable style he said:20
“Those familiar with the evolution of the standard forms in the
building and civil engineering industries in the United Kingdom have
come to expect a steady tide of revision against the commercial
interest of the employer and in favour of the contractor in particular
in permitting more and more financial claims to be made by the
latter — with the result that the original quoted contract price
becomes less and less realistic, and little more than a lure for unwary
employers to enter into projects which they would not undertake if
the ultimate true cost was known to them.
But in the case of the present ‘revision’, that tide has now become
a torrent... It is difficult to see why anyone with a full understanding
of the practical consequences of the changes should have approved
of the terms of the new contract on behalf of employers.”
Two of those responsible for the drafting of the 5th edition (Sir William Harris and
Mr David Gardam QC) tartly responded:21
“Mr Wallace’s attitude is one which was widely adopted in England
in the nineteenth century and no doubt it could be argued that a
policy along the lines which he suggests should be adopted today.
Unfortunately, however, he obscures any merit in his viewpoint by
regarding contracts for civil engineering works as a battle between
the Contractor — in dishonest collusion with suppliers and sub-
contractors — and the Employer — aided by incompetent allies in
20 New Civil Engineer Nov 1, 1973, reprinted in Duncan Wallace, The ICE Conditions of Contract 5th edn: A
Commentary, 1978 at 345.
21 New Civil Engineer Dec 20 1973, reprinted in Duncan Wallace at 357.
14
The Principles of the Law of Contract
the shape of engineers and unknowledgeable legal advisers — in
which battle the Contractor is for ever “going over to the attack,”
preparing “traps” for the Employer and the Engineer.”
In their experience, such a view of the industry was “completely unreal”.
Secondly, the contracts have traditionally placed substantial responsibility on the
engineer for approving variations, time extensions and payments, and deciding
disputes. There is of course much practical sense in having a single administrator
and decision-maker. But what this also achieves is the advance prescription and
objective certainty the law requires. The contract provides in advance for the
possibility of variation, and provides a single mechanism removed from the parties
for achieving it. But the responsibility this has placed on the engineer is enormous,
and, I think, pretty much unique in our law. The engineer is both an agent of the
employer and an independent decision-maker. As Lord Reid put it, he has:22
“...two different types of function to perform. In many matters he is
bound to act on his client’s instructions, whether he agrees with
them or not; but in many other matters requiring professional skill
he must form and act on his own opinion.”
That is a heavy and unusual burden. Modern contracts introduce other and more
evidently neutral dispute adjudicators.
Thirdly, most contracts provide for remedies, and modes of enforcement and
dispute resolution, beyond anything the common law could achieve. They provide
for termination in a range of circumstances going beyond those which would
justify cancellation at common law; they provide for suspension of work in defined
circumstances. The old NZSS 623 used to provide also for the interesting device
of allowing the employer to take possession of the works: I see it has gone in the
modern version. Moreover, the contracts tend also to provide for arbitration to
resolve disputes, and the more modern ones envisage mediation and other forms
of alternative dispute resolution. It is worth noting that total exclusion of resort
to the courts is not possible unless statute allows it; the legal system perceives
the courts as the central enforcers, and any attempt to exclude access to them
completely is illegal. But you can provide for another form of dispute resolution
as first choice, leaving the courts as a second alternative. Also, as I said, statute
can modify this. New Zealand’s arbitration legislation does retain a limited right
of recourse to the courts, but it differs according to whether the arbitration is
domestic or international. I note here also that the Construction Contracts Bill
currently before the New Zealand parliament provides for a type of adjudication
which can run concurrently with other mechanisms for dispute resolution.
Their effectiveness
As I have said, the contracts contain much detail. In addition, some versions,
22 Sutcliffe v Thackrah [1974] AC 727 at 737.
15
John Burrows
particularly the older ones, were subject to the vices endemic in British legal
drafting. They used many surplus words and repetition; they were not very well
ordered; they contained archaisms like ‘aforesaid’ and ‘hereintofore’; the sentences
were often unreasonably long, sometimes more than 200 words.23 The flurry of
words was in part a reaction to the court’s approach: if there is a danger the court
will interpret a word literally and narrowly, you use another word as well, and
another and another, to make sure nothing is left out. I once asked an experienced
draftsman (a senior government official) why he drafted with such verbosity and
he replied “You have to make it judge-proof.” That was, of course not the only
reason. Drafters had just traditionally done it that way. There was also a resistance
to change, based on a (spurious) fear that chaos would ensue if the old forms,
encrusted with court precedents, were abandoned.
Yet this style of drafting has real problems. Firstly, it creates obscurity. A judge of
the New South Wales Supreme Court stigmatised certain construction contracts
as “unduly prolix, repetitive, and often unclear in their meaning”. Many of the
conditions, he said, were “not models of clear thinking or reasonable
draftsmanship.”24 For this reason I suspect many contractors, and indeed other
professionals, never read the small print. The desire to be comprehensive often
detracts from the need to be comprehensible. Communication comes second.
Secondly, this desire to provide for everything can never achieve its object anyway.
Complete coverage is unattainable. No one can predict everything that can go
wrong with a project and provide for it in advance. And language does not have
mathematical precision: it is often open to argument whether a word or phrase is
apt to cover an event which has happened. Sometimes even a phrase which can
seem crystal clear in the abstract can be thrown into confusion when you try to
apply it to some unforeseen contingency.
So what happens? Even the most comprehensive contract will require interpretation,
and cannot be thoroughly understood unless it is read in the light of numerous
court cases interpreting its words. Books have been written about the standard
forms. Often those books, useful though they are, express doubts as to what
some of the clauses mean.
Another inevitability is that gaps are always being found in contracts; and,
paradoxically, the more detailed and precise a contract is, the more gaps are
likely to emerge. So the contract then needs to be amended and added to, and
that can compound the problem. Here, again, is Duncan Wallace, speaking of the
5th edition of ICE:25
“Inevitably, given the obscurity and complication of much of the
23 The longest sentence I know of in a New Zealand legal document is 1299 words with no punctuation at all (I
am indebted to Peter Butt who discovered it).
24 Smart J (1989) 5 BCL 7, cited in Hudson (above n 17) at 118.
25 Duncan Wallace (above n 20) at p1.
16
The Principles of the Law of Contract
language of the Fourth Edition, and the special drafting difficulties
of any piecemeal task of modification and amendment of a lengthy
document, there are many areas of difficulty and obscurity in the
new contract, as well as inconsistencies or overlapping.”
Lord Justice Parker once said of such contracts that “they are apt to be somewhat
like Topsy and they just grow without anybody thinking very much what is
happening during the course of growth”.26
Modern Developments
Where do we go from here? There are a number of promising developments.
Other presenters will be more up to date with them than I am. Here are some of
the things that are happening.
The courts and the common law
The courts, and the law of contract, are in the throes of change, but much remains
to be done. Precedent is hard to shift.
I have already foreshadowed these developments. To summarise:
• Non-contractual rules, such as those in the tort of negligence, are affecting the
contractual purity (I might also mention estoppel and some statutory
interventions).
• One-sided variations of contract are tolerated in some situations.
• There is greater determination to give effect to open-ended terms provided the
court is satisfied that the parties intended to be bound by a contractual
relationship.
• There is more talk of “good faith”, although it is yet far from acceptance as a
general ingredient in all contractual relationships. Britain’s membership of Europe,
where the concept is better known, may influence developments there.
• There is continual emphasis that contract interpretation should be purposive
rather than narrowly literal; it should lead to decisions which exhibit business
common sense.
The new contracts
The contract forms have been changing too.
Plain Drafting
There is a move towards plain English drafting, not just in contracts but also in
statutes and other types of legal document. I believe it works. It involves the
26 Mander Raikes & Marshall (a firm) v Severn-Trent Water Authority (1980) 16 BLR 34 at 43.
17
John Burrows
presentation of the message in as direct and uncomplicated a fashion as possible.
Superfluous words, repetition and archaic expressions are eliminated; tortuous
grammar is avoided; long sentences and paragraphs are broken up into shorter
ones; the whole document is better ordered and flows more logically. Quite often
detail can be reduced and replaced by statements of principle. Plain English
drafting does not always result in a shorter document, but it usually does:27 it
depends on the subject matter, and how much detail is necessary to do an
effective job. I think construction contracts will always require a fair amount of
detail.
When you see how good some of the modern drafting is it makes you wonder
why we persisted for so long with the windy, verbose, traditional style. Some of
the revised construction contracts are fine examples of what can be achieved. The
drafters have virtually started from square one. NZS 3910 is much clearer than the
old NZSS 623. The 1999 FIDIC is a much more elegant document than its
predecessors, although no shorter: its comprehensibility is due to short sentences.
And the New Engineering Contract (NEC), a quite revolutionary document, is
beautifully simple. Some of its sentences are little more than one line, and none
are more than 40 words, and it is drafted in the present tense, eliminating the
traditional ‘shall’. (Ironically lawyers, long derided for their incomprehensible prose,
have participated in this drive for clarity: the more tortuous jargon-ridden styles
have now shifted to other professions.)
But there is one catch. More economical styles of drafting can make new demands
on an interpreter. The less detailed the drafting and the more reliance on principle,
the more one depends on an interpretation which is sympathetic to purpose and
not entangled in literalism.
Cooperation and Good Faith
Some new forms of contract — including the NEC — use terms such as “will
cooperate”, “will use best endeavours”, and even “will act in good faith”. They
are starting to appear in contracts other than construction contracts too. Because
they are express terms, the courts (in the rare cases that come before them) have
had to try to give them meaning. This is new territory. The courts have said they
mean that:
• each party will act in a way which will advance the common objectives of the
parties; and
• good faith is an excluder, in that it excludes obstructive conduct and conduct
which is in bad faith.
27 There are some striking examples in New Zealand statute law.  For example s5(1) of the Interpretation Act 1999
contains 18 words, compared with 85 words in the 1924 version which it replaced.  In his book FIDIC 4th A
Practical Legal Guide (1991) Mr E C Corbett provides for each clause of FIDIC a plain English paraphrase which,
he says, is “to enable the reader to understand the gist of the clause as quickly as possible”(at vii).  In every
case his version is much shorter and clearer, and it is hard to find anything of substance that is omitted.
18
The Principles of the Law of Contract
Apart from that, though, what is required depends on the wording, the context,
and the objectives of the contract in question.28 There is some working out to do.
Partnering
Some see partnering as the way of the future. The experiences of it, particularly in
the United Kingdom, are reportedly most favourable. It involves the major players
in a project agreeing on common goals and strategies and the maximisation of
joint resources. They agree to work together in a spirit of goodwill, trust and
cooperation. Trust and teamwork prevail over the adversarial approach.
Perhaps this is no more than a formalisation of what some businesses have been
doing, de facto, for a long time. It emphasises good old-fashioned values like
mutual respect. Socio–legal studies dating back nearly 40 years have shown that
in many commercial dealings parties who know and trust each other make their
dealings work without recourse to the law at all; indeed much of what happens in
the performance and progress of their projects bears little relation to the strict
legal position or even the wording of their contracts. They rely on common sense,
and sort things out as they go along.
Partnering arrangements differ. Some are in the form of charters (which may not
be contracts at all); others are more detailed and formalised. The view a court of
law would take of them is unknown, and if they do their job as they are intended
to may remain unknown. No doubt there are sceptics who will ask what happens
if the relationship breaks down, or who will wonder whether cooperation could
lead to a cosiness which encourages compromise. But those with experience of
the new system are most enthusiastic.
Alternative Dispute Resolution
Most of the newer forms of contract now provide for the resolution of disputes
outside the courts. They doubtless take pressure off the engineer as well. The
1999 FIDIC sets up a Dispute Adjudication Board which aims for amicable settlement;
arbitration is available if that fails. NZS 3910 provides for an engineer’s review,
mediation, and arbitration. NEC sets up an adjudicator. ADR has exciting
possibilities. It is private, and, hopefully, quicker than court proceedings (although
not necessarily cheaper). Most importantly, it substitutes for a court’s win/lose
decision the possibility of a consensually agreed settlement aided by a person
who is a specialist in the area. It enables inventive solutions. Imposed solutions
based on rules sometimes do not work, especially if they are made by people
who are not themselves as familiar with the practices of the industry as the
parties themselves.
28 See Symphony Group Ltd v Pacific Heritage (Auckland) Development Ltd HC Auckland, CP 362/98, 17 August
1998; NZ Licensed Rest Homes Assoc Inc v Midland Regional Health Authority HC Hamilton, CP 34/97 15 June
1999 affd CA 17 July 2000.  I am indebted for these references to Professor Charles Rickett’s paper “Some
Reflections on Open-Textured Commercial Contracting” presented to the Centre for Commercial and Corporate
Law, Christchurch 11 October 2001.
19
John Burrows
There are a large number of ADR methods ranging through mediation, mini-trial
and appraisal. Some contracts provide for a tiered succession of them to be
undertaken in order. (There may be doubts as to the wisdom of this several-bites-
at-the-cherry approach). Lawyers may also reflect on a system which aims to keep
the new forms of contract out of the courts: there would then be no binding law
at all on their correct interpretation. The nature, and effectiveness, of ADR is the
subject of other chapters in this book.
Statute
Finally, in areas where the law has not operated smoothly, parliament can always
step in with a legislative solution. In New Zealand that has happened more than
in many other countries. Our law of contract is now peppered with statutes
dealing with such matters as remedies for breach, mistake, illegality and misleading
conduct. Some of these statutes can be overridden by the parties’ express
agreement, some (like the Fair Trading Act) cannot.
The new Construction Contracts Bill currently before Parliament in this country
will impose a statutory regime, which cannot be contracted out of, on certain
aspects of construction contracts. In particular it will outlaw ‘pay if paid’ clauses;
it will allow for suspension of work if payment is not made; it will provide a
method of ‘quick and dirty’ adjudication of disputes which is supposed to co-exist
with other forms of dispute resolution; and it provides in a limited way for charges
over land.
Statutory intervention like this is sometimes necessary, but almost always there
is difficulty dovetailing the new legislation with the existing law and the terms of
the parties’ contract. Sometimes it can cut across them. The New Zealand bill, if
passed, is going to require some relearning.
20
The Principles of the Law of Contract
21
Ernesto Henriod
Abstract
The trail of the evolution of the modern construction contract starts in earliest recorded
history, with the Hammurabi codes. Construction contracts have also been recorded in
ancient Egypt, although the great works of antiquity — such as the pyramids — were
usually developed as labour-only contracts.
An important stage of development of the construction contract was reached in Roman
times. Some of the principles developed in that era have been reflected in today’s contract
law. After the demise of the Roman Empire, and the ensuing period of obscurity in the
Middle Ages, Common Law arose gradually, together with the principles upon which formal
construction contracts would take shape in the Industrial Revolution.
The standard forms of construction contracts developed in Great Britain in the late 19th
century were the precursors of the modern ICE and other institutional forms of contract.
The ICE Conditions of Contract were later followed by FIDIC in the drafting of their Red
Book and other engineering contract forms, which have now been replaced by the FIDIC
Suite of Contracts of 1999. The Institution of Civil Engineers also took a further step
forward, with the drafting and issue of the New Engineering Contract, which changed the
literary style and management approach of the traditional forms. Concurrently, a change in
the culture of the construction industry, away from confrontation and towards collaboration,
allowed the resurgence of contract arrangements based on mutual trust and respect among
the contracting parties.
In the following pages we review briefly the evolution of the engineering contract, as a
preamble to the discussion of the current state of the art of contract drafting and contract
management. In collating this account, we have drawn from papers written by Martin
Barnes, published in Civil Engineering, a journal of the Institution of Civil Engineers, London,
from books published by Nael Bunni, and from various other texts on business law and
contracts, listed in the footnotes. We have particularly focused on the development of the
construction contract in the British Isles — leading to the ICE standard form, the precursor
of earlier FIDIC forms and leading also to the New Engineering Contract. New Zealand, the
Commonwealth and many other countries have drawn from that experience to formulate
their own contract standards, as have the international development banks.
3 Evolution of theEngineering Contract
Ernesto Henriod
22
Evolution of the Engineering Contract
23
Ernesto Henriod
Introduction
A contract has been defined as “an agreement, upon sufficient consideration, to
do or not to do a particular thing”. A more specific approach is to define contract
in terms of the element which is common to all contracts: a promise. Accordingly,
a brief but acceptable definition is a “promise enforceable by law”.1
In spite of such a simple definition, contract law did not arise in pre-commercial
societies. Even in trade based on barter, the exchange concluded the deal, and
there was little or no recourse to further payment or adjustment of the traded
goods. In other words, after the goods had changed hands, there was no need to
offer or record a further promise regarding those goods.
Ancient History
A culture of business and a market economy had to develop before contract law
became necessary. The earliest recorded history of contracts being used as the
basis for commercial transactions dates back to the Egyptian and Mesopotamian
cultures of between 3,000 and 4,000 years before our era. Perhaps the most
famous and earliest record of codified construction law is contained in Hammurabi’s
Code of 1760 BC. In his book on construction insurance2, Nael Bunni gives a few
examples of the Hammurabi rules pertaining to construction. These include:
“#229: If a builder builds a house for a man and does not make its
construction firm and the house which he has built collapses
and causes the death of the owner of the house that builder
shall be put to death.
#232: If it destroys property, he shall restore whatever it destroyed,
and because he did not make the house which he built firm
and it collapsed, he shall rebuild the house which collapsed at
his own expense.
#233: If a builder builds a house for a man and does not make its
construction meet the requirements and a wall falls in, that
builder shall strengthen the wall at his own expense.”
These and other rules of the Hammurabi Code defined construction risk and
responsibility, and the manner in which failure to perform would be treated. The
Code required that the builder would promise to deliver a safe and sound house,
in accordance with the requirements of the owner, or face the consequences of
his failure to perform.
The great works of antiquity, however, tended to be built by massed labour,
under the direct management of the state. The Great Pyramid of Giza, for example,
1 Business Law, Fifth Edition.  Len Young Smith, G Gale Roberson et al, West Publishing Co, St Paul,
Minnesota, 1982
2 Construction Insurance.  Nael G Bunni, Elsevier Applied Science Publishers, London and New York, 1986
24
Evolution of the Engineering Contract
was built without recourse to power or machinery. It demanded a high degree of
organisation, to round up a force made up, in part, of slaves from lands conquered
by the dominant culture, and farmers who had to contribute their work as a
primitive form of taxation. The architects of such grandiose works were members
of the rulers’ courts, highly respected and close to the pharaoh. The relationship
between the master builder and the labour organisers required a form of ‘labour
only’ contract, specifying the rules of their employment: labourers were not
expendable, and the duration of their work and their health and safety were
protected.
Roman Times
The development of construction management reached a peak during Roman
times, reflecting a long economic, political, social and legal evolution. Justinian’s
law books of the 6th century AD recognised various types of contract, and
determined their enforceability by the courts and state administrators. “The Romans
built their roads and aqueducts with what we now regard as a very modern
approach to contract strategy and the management principles that lie behind it.
They were masters of delegation and distribution of responsibility around a large
team of contributors to a civil engineering scheme. They did it with a well-developed
understanding of incentives and motivation. The modern concept of partnering
would have been familiar to them.”3
Contract law and construction management continued to evolve until the demise
of the Roman Empire and the onset of the Dark Ages, when the western world
changed from an urbanised, organised society into disperse agrarian communities
and the Roman administrators were replaced by weaker institutions.
Common Law
The next important development came after the Norman conquest of England,
when formal contracts, issued under written and sealed promise, became
enforceable under law. Later, failed oral promises first became recognised as
deceit, treated as a tort. By the early 17th century, the common law courts accepted
the enforcement of simple contracts, i.e. promises given not under seal. After a
long period of development, the courts finally focused on the presence of
consideration as the prime test of enforceability of a contract. Thus we come to
the present day definition of an enforceable contract4, which must be based on
an offer and the acceptance of that offer, made and accepted by parties having
capacity to contract; the agreement must be based on a promise to perform a
certain contractual matter that must be legal, and must be supported by
consideration.
3 “Civil Engineering Management in the Industrial Revolution”.  Martin Barnes, Civil Engineering No 138, August
2000
4 Business Law, Principles and Cases, Second Edition. Harold F Lusk, Charles M Hewitt et al,  Richard D Irwin
Inc, Homewood, Illinois, 1970
25
Ernesto Henriod
Early Contracting in the UK
This general concept of contract law was translated to the construction contract
as it evolved from the start of the great civil engineering works in Great Britain.
The pioneering works were those of the canal network, a primary transportation
grid developed between 1760 and 1830. The volume of civil engineering
construction, already substantial at the time of the construction of the canal
network, increased dramatically after the development of steam engines and the
advent of the railways late in the Industrial Revolution. Such volume required the
rise of a new professional activity — that of the civil engineer and master builder
of canals, rail lines, tunnels and bridges.
Those were tentative times, in terms of the contractual arrangements and styles
of management being used by the various practitioners. They varied from the
labour-only types of contract preferred by James Brindley, and the competitive
bids preferred by others, to the direct contracting of works with tried contractors,
as favoured by Thomas Telford. The styles of management ranged from the openly
conflictive and dictatorial manner of Isambard Kingdom Brunel, to the collaborative
approach of John Rennie. There were many forms of contract in use, practically as
many as master builders or engineers were in the business of developing the
great works of the times.
Those early, tentative days saw the introduction of principles that were later
incorporated into standard forms. John Smeaton introduced the concept of the
‘resident engineer’, as a delegate of the engineer in chief. This concept was later
further developed by Joseph Locke, whose contracts referred to the Engineer, as
the decision-maker, sovereign arbitrator and amicable judge. Others found problems,
devised ways to resolve them, and coined phrases and drafted contract clauses
to suit those circumstances: Robert Stephenson, for example, had to deal with
‘unforeseen ground conditions’ in tunnel construction. His approach at catering
for the presence of unanticipated site problems was to enter into contracts with
no completion date or final cost — a precursor of today’s ‘observational’ contracts,
used where site conditions are indeterminate.
Some of the problems that would later plague the industry also arose in those
times. Robert Stephenson found difficulties with the indiscriminate award of
contracts to the lowest bidders: “many of the contractors got into difficulties and
the company had to take over the work by direct management.”5 And Brunel,
clearly one of the pioneers of civil engineering construction, was such a poor
project manager that many of his contracts were late, over budget, and ended in
disputes. Brunel’s contracts placed the Contractor at the mercy of the Engineer.
His “dictatorial approach to contractors produced many disputed claims which
were subsequently taken up by the contractors through the courts”.5 Thus, he
was also a precursor of the adversarial culture which dominated a considerable
part of the construction industry over the next century.
5 Martin Barnes, see footnote 3.
26
Evolution of the Engineering Contract
The Industrial Era and the ICE Conditions of Contract
As the Industrial Revolution moved into the industrial era, a milestone in the
development of the modern contract form was reached in the 1860s, with the
drafting of the contracts for the construction of major sewers in London and
embankments on the river Thames by Sir Joseph Bazalgette. This form of contract
was adopted by the (London) Metropolitan Board of Works as a standard, and
“remained the principal model for well over 100 years; it was the model for the
first edition of the ICE contract published in 1945.”6
The ICE Conditions of Contract were revised a number of times, until they reached
their present form in 1973. By then, the document had been sanctioned by the
Federation of Civil Engineering Contractors and the UK Association of Consulting
Engineers.
Many professional organisations around the world used the ICE Conditions of
Contract as the model for their own standard documents. Among them, the
International Federation of Consulting Engineers, generally known by its French
acronym, FIDIC, who issued its third edition of the ‘Red Book’, Conditions of
Contract for Works of Civil Engineering Construction in 1977, based on the ICE
model of 1973.7
FIDIC and the International Contract Forms
Nael Bunni comments, “Originally, these documents were drafted in precise, legal
language which would remain unequivocal even when subjected to detailed and
hostile scrutiny by astute legal minds. However, as revisions were incorporated,
the language became more and more complicated and inscrutable.”8 Bunni carried
out a study of the text of the FIDIC Conditions of Contract, and found that the
sentences were so long and complex, that 86% of them could theoretically only
be understood by 4% of the population, equivalent to those having an IQ of 130
or greater.
In spite of its complex structure and phrasing, the FIDIC Conditions of Contract
remained the only accepted international form of contract and, over the years, the
document became supported by an extensive history of court cases to assist in the
interpretation of its clauses. Thus, the international development banks — notably
the World Bank and the Asian and Inter-American Development Banks — adopted
the FIDIC Conditions of Contract for their Standard Bidding Documents (SBDs).
The current issues of the SBDs still incorporate the 4th Edition of the FIDIC Red
Book, as amended in 1992. The banks are currently discussing closer coordination
of their SBDs, and considering how to adopt the latest version of the FIDIC forms
of contract.
6 Martin Barnes, see footnote 3.
7 FIDIC 4th—A Practical Guide. E C Corbett, Sweet & Maxwell, London, 1991.
8 Nael G Bunni, see Footnote 2.
27
Ernesto Henriod
The New Engineering Contract
The challenge of resolving the complexity of the language in the 1973 ICE Conditions
of Contract and its derivatives prompted the Institution of Civil Engineers to
embark upon the drafting of a new set of conditions of contract in 1985.
The initial concept for this new approach arose from a radical reform of project
management systems funded by the British Property Foundation (BPF). The BPF
system was based on a fundamental review of management processes and contract
relationships. A manual was published by the BPF in 1983, but it was little used,
as it was not supported by suitable conditions of contract.9
However, the Manual provided the prototype for the work begun in 1985 on the
development of a totally new form of contract for engineering work.
This was the first attempt at reform in over 100 years and it resulted in the issue
of the New Engineering Contract (NEC) in 1993. The NEC is based on best modern
project management principles; it is designed to cater for the various relationships
required by a modern engineering project; it uses simple procedures and language,
with terminology that can be used not only in civil engineering construction, but
in engineering projects more generally; it was developed using flow charts so
that the processes it involves are logically complete and can be represented in a
computer system to handle the information flows; and all the processes it embodies
have been designed to reward cooperative behaviour, instead of adversarial
attitudes and behaviour, by the participants in a contract.
The NEC has now been adopted widely: it is being used in about 90% of all
infrastructure projects in the UK, and is currently in use in over 20 countries
around the world. According to Barnes, its use has led to smooth management of
projects, to the point that the Adjudicators have very little work in the resolution
of disputes, and there have been no court cases arising from claims and disputes.10
A prototype of the NEC was incorporated in the preparation of the World Bank’s
Sample Bidding Documents for Smaller Works (SBD-SW ), first issued as a ‘Test
Edition’ in December 1991, amended in 1992, and finally issued as a Standard
Bidding Document in 1995.
Barnes collaborated with World Bank staff in the production of this document,
which met general approval among its users, to the point that it was adopted by
some governments for the development of their own standard conditions of
contract. The issue of the SBD—SW, which marked a departure by the development
banks from the traditional forms of contract, may have prompted other review
and redrafting work by international agencies.
9 The story of the development of the New Engineering Contract draws from the paper on “Civil Engineering
Management in the New Millenium” by Martin Barnes, Civil Engineering, No. 138, May 2000.  Martin Barnes
headed the team that developed the NEC.
10 Martin Barnes, at the CAE Conference on The Contract in Successful Project Management, Christchurch, New
Zealand, February 2002.
28
Evolution of the Engineering Contract
The New FIDIC Suite of Contract Forms
The FIDIC principals realised that they had to update their Red Book, still based
on the ICE 1973 standard, as well as their other contract forms for engineering
work. Their drafting work resulted in the issue, in 1999, of the new FIDIC suite of
conditions of contract. The new documents did not refer to the specific type of
project but, rather, were based on the allocation of the design function: the new
Red Book is for building and engineering works designed by the Employer; the
new Yellow Book for electrical and mechanical plant and building and engineering
work designed by the Contractor; and the Silver Book is for turnkey projects. The
language has been much simplified, albeit at the expense of the length of the
documents: the new Red Book has 26% more words than the old Red Book
(30,431 vs 23.544). Given the change of orientation of the documents, the
comparison is perhaps not strictly correct — it can just be taken as a general
indication of the effort expended in the simplification of language, and the
decompression of the old legalese shorthand. In addition, the new suite of contract
documents contain amendments (such as the price adjustment formula, the contract
neutral and certain guarantee conditions) that the development banks, in the
past, had had to incorporate in Part II (Conditions of Particular Application)
appended to the basic FIDIC contract.
‘Contract Neutrals’
Another important modern development has been that of the incorporation of a
neutral within the contract. This is not an ad-hoc ‘mediator’ brought in only when
a dispute arises; rather, the neutral is appointed in the contract, and keeps a
watching brief over the development of the project. The neutral is therefore in a
prime position to defuse issues as they arise — and, since the neutrals are
usually professional people or panels of very high repute, experienced in the
type of contract under supervision, their counsel has been respected by all
participants.
The most important initiative related to contract neutrals arose in the north-west
of the USA, in the 1980s. Highway tunnel projects had been the subject of many
disputes. Panels of three experts were appointed to act as ‘Dispute Review Boards’
(DRBs), keeping track of development of the projects and assisting in the resolution
of problems as they arose. They were hugely successful.
The use of DRBs quickly extended to other contracts and countries: the World
Bank pioneered its use in an international contract for the El Cajon Dam, in
Honduras, in 1985, and later incorporated DRBs in its Standard Bidding Documents,
as from the 1991 issue. The latest statistics published by the DRB Foundation
show that DRBs have been used in 822 projects, with a total contract value of
US$68.7 billion. The Boards have issued 1,038 formal recommendations — and
only 31 cases developed into disputes that had to be dealt with beyond the DRB
(no less than 15 of the latter cases arose in a single contract fraught with difficulties).
This is an extraordinary record, which prompted the DRB Foundation to propose
29
Ernesto Henriod
to change the name of the panels, to ‘Dispute Resolution Boards’.11
The contract “neutrals” have been adopted in the NEC, where an Adjudicator
serves in that function and is appointed ab initio, as are the Disputes Adjudication
Boards (DABs) now included in the FIDIC suite of conditions of contract.
The last decades have also brought about a change of culture in the construction
industry, away from confrontation and towards cooperation among the parties to
a contract. In turn, this has made it possible for new approaches to project
management to come back in fashion, approaches that require mutual respect
and collaboration. These are not new forms of contract, they are variants or
supplemental agreements. They have been used in the past with the conditions
of contract existing at the time, provided there was good will and close
understanding among the participants. However, the improved cultural environment
of the industry, and the existence of more manageable forms of contract (particularly
the NEC), have fostered the resurgence of partnering, target contracts, guaranteed
maximum price contracts, design-build and other variants of performance-based
contracts.
In New Zealand
The current basic contract document issued by NZ Standards is NZS 3910:1998,
Conditions of Contract for Building and Civil Engineering Construction. It was
preceded by NZS 3910:1987, NZMP 3911:1992, NZMP 3912:1992 and NZMP
3914:1994. In turn, these derived from NZS 623P:1984 and NZS 623:1964.12
NZS 3910:1998 draws from the long tradition of British contracts, but has developed
beyond the 1973 ICE model. It maintains the use of plain language, and is attuned
to changes of law prior to 2002: the Building Act 1991, the Health and Safety in
Employment Act of 1992, the Companies Act of 1993 and the Arbitration Act of
1996. It includes provision for the amicable resolution of disputes (albeit not a
neutral appointed ab initio), seeking to avoid the expense and delay of arbitration.
A further revision of NZS 3910 is currently being processed, at the same time as
a new Act on construction contracts makes its way through Parliament. This may
be an excellent opportunity to incorporate the neutrals in the New Zealand Standard,
not just as ad-hoc mediators but as participants from the start of the Contract.
A more detailed review of NZS 3910 and other New Zealand forms of contract —
and a comparison with other standard forms — is given in Chapter 7.
11 Forum, Volume 6, Issue 1, January 2002.  The Dispute Review Board Foundation, Seattle, Washington, USA. The
change to Dispute Resolution Board Foundation is subject to consultation with Foundation members.
12 From the Foreword: New Zealand Standard 3910:1998
30
Evolution of the Engineering Contract
31
4 Risk Management
Nael G Bunni, Jason Le Masurier & Patrick Tuohey
Abstract
As discussed in earlier chapters, contracts are among the tools available for risk management
in projects. In that context, risk management is generally perceived as one aspect of
project management. However, in a broader sense, project management itself can be
viewed as a form of risk management. In the first part of this chapter, a paper by Nael
Bunni considers the former, established view. His paper defines risk and the process of risk
management, and then discusses the allocation of risk and consequent liability with particular
reference to the FIDIC conditions of contract.
In the second part of the chapter, Jason Le Masurier considers the broader view of risks
associated with particular management approaches and concomitant project culture.
He proposes the observational method as a generic model for managing project uncertainties,
allowing minimisation of risk and maximisation of opportunity.
In the third part, Patrick Tuohey continues the broader view of project risk management
and describes the process of the Australian and New Zealand Standard on risk management.
He examines how these processes are being used in the development and implementation
of contracts in the construction industry.
32
Risk Management
33
Part 1: Sharing Risk through
Contractual Relationships
Nael G Bunni
Introduction
The subject of risk, its assessment, allocation and management has developed
and been applied on an increasing scale over the last twenty years. New regulations,
such as the Health and Safety at Work Regulations introduced in a number of
jurisdictions, and in particular those recently imposed in the European Union,
gave the subject of risk an even greater significance. Under the UK Construction
(Design and Management) Regulations of 1994, there is a requirement to carry
out risk assessment of planned work at different stages of the construction project,
and to take reasonable measures to deal effectively with any significant risk.
However, there is little uniformity of approach to the topic of risk and, surprisingly,
only a few useful general practical applications have been developed in this area.
The lack of uniformity extends even to the definition of ‘risk’ and what is meant
by it.
Etymologically, the origin of the word ‘risk’ in English (‘risque’ in French; ‘riesgo’
in Spanish and ‘rischio’ in Italian) is uncertain. The Latin word ‘resecum’, meaning
‘danger’ or ‘rock’, may throw some light on its origin but — leaving aside
etymological considerations — the Chinese ‘wej-ji’ with the characters representing
‘chance’ and ‘danger’, is more illustrative of the concept of risk, as it applies to
the construction industry today. This concept has evolved with these two notions
embodied in it. It encompasses with every decision one makes, not only the
danger of a loss but also the chance of either obviating it or the chance of making
a consequent gain.1
Decision-making often, if not always, involves some risk taking. However, the
well-informed decision maker will be aware of the risks associated with a made
decision and will endeavour to reduce all foreseeable harmful effects and their
consequences to an acceptable minimum.
The Definition of ‘Risk’
Risk is defined by British Standard 47782 as “A combination of the probability, or
frequency, of occurrence of a defined hazard and the magnitude of the
consequences of the occurrence”. In the same British Standard, the definition of
hazard is given as “A situation that could occur during the lifetime of a product,
1 Nael G Bunni, “The FIDIC Form of Contract – The Fourth Edition of the Red Book”, Blackwell Science, second
edition, Chapter 7, Oxford, 1997.
2 British Standard No. 4778: Quality Vocabulary, Part 3, Section 3.1: 1991, The British Standard Institution, Milton
Keynes, UK. The author notes that the NZ Standard is more accurate as it allows for risk to include positive as
well as negative events by replacing the word ‘hazard’ by ‘event’.
34
Risk Management
system or plant that has the potential for human injury, damage to property,
damage to the environment, or economic loss”.  Based on these two definitions,
risk may be expressed in the form of a mathematical equation, as follows:
R = P x C,
in which R is Risk, P the Probability, or frequency, of the occurrence of a defined
hazard, and C the Consequences of the occurrence of that hazard.
There are a number of points that flow from the meaning of risk and its mathematical
expression shown above, as follows:
• An undesirable event may have a number of different causative factors, of
which one, or any combination, could lead to its occurrence. For example, if the
undesirable event is the collapse of a cofferdam at a construction site, such
collapse may have been caused as a result of bad ground conditions, material
failure, defective design, or a combination of some or all of these factors. All
these factors are referred to as hazards.
• A hazard can, therefore, be construed as a dormant potential for inconvenience,
loss, damage to property, damage to the environment, moral damage, injury or
loss of life. To eventuate, it is triggered by a particular incident, which may be
referred to as a ‘triggering incident’. A triggering incident is usually necessary
for a hazard to eventuate into an undesirable event. For example, if the cofferdam
collapse mentioned above was due to a defective section in its wall, the triggering
incident could be the imposition of an additional loading beyond the limit
sustainable by that defective section.
• The hazard may result in different levels of severity or magnitude of consequences
depending on the particular circumstances and timing of the event. For example,
the consequence of the collapse of the cofferdam mentioned above may be a
financial loss in the form of the cost of the repair to the cofferdam, or it may
extend to a critical delay in the completion of the project, or it may go beyond
the financial loss and delay into personal injury and death.
• Expressing risk in a mathematical formula permits and facilitates a comparison
of the magnitude of the various risks to which a project is exposed. Such a
comparative analysis may then be used to decide on whether to accept a
particular risk or take measures to eliminate it or, at least, to mitigate its effect.
In summary, when a hazard eventuates into an undesirable event, the sequence
of events can best be expressed as follows:
Hazard
Trigger
Incident
Undesirable
Event Consequence
Assessment
and
Evaluation
Any assessment and evaluation carried out on these consequences may be used
subsequently in the measurement of risk in relation to that particular hazard.
35
Measurement of Risk
As explained above, when considering the acceptability of a particular risk or
when comparing risks in a particular project or a number of projects, it is useful
to have the formula referred to in the previous section. Considering the first
variable, the consequences of an undesirable event, British Standard No. 4778
classifies the consequences of hazards into four categories of severity:
• negligible;
• controlled or marginal;
• critical; and
• catastrophic.
This classification is based on the effect produced once the hazard is triggered
into an event, and may include any one, or a combination of: loss of life, personal
injury, damage to reputation, material damage, financial loss, loss of time, and
mental distress. Therefore, the consequences of a hazard resulting in an undesirable
event range from those which are negligible and can be disregarded, to those at
the other end of the scale which would include loss of life, personal injury, or
material loss of various types.
In order to express this variable, the consequences of hazards, as numerical data
for insertion in the above formula of R = P x C, a number of categories can be
extrapolated from BS 4778, to each of which a range of numerical values can be
assigned. The basis of these values may differ from one situation to another so,
for example, they may be based on the expected economic loss, expressed as a
percentage of the overall cost of the venture or the project:
Category
of loss
The consequences of a hazard eventuating Percentage
of cost of
project
  0 No Loss Nil - 0.09
  1 Nuisance type small losses 0.1- 0.99
  3 Medium Losses which can be borne by the individual
concerned
1- 4
  5 Large losses 10 – 19
  6 Probable maximum loss in the range of the largest
previous losses of similar projects
20 – 40
  7 Serious and exceeding any previous events 41 – 80
10 Catastrophic - total loss 81 - 100
Other sets of categories can be worked out for different ventures or projects.
Values for the second variable, probability of occurrence, can be calculated by
Nael G Bunni
36
Risk Management
setting a range from 0 to 1. For example:
Probability of
Occurrence
The Event
0 It is certain that no loss would occur - loss is not possible
0.3 Slight probability of occurrence
0.5 Equal chance of occurrence or non-occurrence
0.7 Strong probability of occurrence
1.0 Certain to occur
The probability of occurrence of many undesirable events can be calculated from
data available from various existing sources. Where such data is unavailable, a
best estimate based on experience and common sense could be used. In this
regard, it is important to note that the probability of occurrence refers only to
occurrences during the period of the particular contract.
Various methods and formulae are available for the calculation of probability.
Indeed, within the field of statistics, probability is a major field of study, and the
literature indicates the development of an ever-increasing range of computerised
statistical modelling techniques in the calculation of risk.
Risk Management
As stated earlier, risk management is “the process whereby decisions are made to
accept a known or assessed risk and/or the implementation of actions to reduce
the consequences or probability of occurrence”. It is also concerned with the
mitigation of those risks deriving from unavoidable hazards through the optimum
specification of warning and safety devices and risk control procedures, such as
contingency plans and emergency actions.
If a decision is made to accept a risk, a further decision must be made on whether
or not the risk should be shared. Before such decisions can be made, it is necessary
to go through a systematic process that involves analysis of the possible hazards
to which the project may be exposed and evaluation of their intensity, frequency
and return period. In this regard, the following terms and definitions from BS
4778 are relevant:
Hazard analysis The identification of hazards and the consequences of the
credible accident sequences of each hazard.
Risk quantification The estimation of a given risk by a statistical and/or analytical
modelling process.
Risk evaluation The appraisal of the significance of a given quantitative (or,
when acceptable, qualitative) measure of risk.
37
Risk assessment The integrated analysis of the risks inherent in a product,
system or plant and their significance in an appropriate
context.
Risk criteria A qualitative and quantitative statement of the acceptable
standard of risk with which the assessed risk needs to be
compared.
Allocation of Risks and their Management
When hazards and risks are identified, assessed and analysed, they must be
allocated to and managed by one or more of the various parties involved. Allocation
and management of the hazards and risks would keep them under control, prevent
the occurrence of any harmful consequences or mitigate such consequences should
they eventuate, thus reducing the extent of harm. Such allocation is part of the
risk management process, where the party to whom a certain hazard and associated
risk are allocated should be selected in accordance with certain rules rather than
haphazardly (see Figures 1 to 3 at the end of this paper).
The conclusions of one of the earliest papers on this topic remain valid today,
where the rules for allocation of risks in a construction project were stated to
revolve around the ability of a party to:3
• control any arrangements which might be required to deal with the hazard or
any triggering incident relating to it;
• control the risk or to influence any of its resultant effects;
• perform a task relating to the project, such as, obtaining and maintaining
insurance cover; and
• benefit from the project.4
Although these rules were contemplated in 1983, their application was very recently
preferred to any other rules by a major report commissioned by the Government
of Hong Kong SAR, on the allocation and management of risk in the procurement
of construction projects.5 These rules and others were later debated at a conference
3 Max W Abrahamson, “Risk Management”,  [1983] ICLR 241, also published as Appendix J to a discussion paper
on Construction, Insurance and Law published by FIDIC - 1986, page 49; see also “Defects: A summary and
analysis of American Law”, Justin Sweet, a paper published in Selected Problems of Construction Law,
International Approach, by Peter Gauch (Switzerland) and Justin Sweet (USA), University Press, Fribourg,
Switzerland, Sweet & Maxwell, London, 1983, page 97.
4 As an example of the ‘benefit’ principle, although referred to as ‘incentive’ and not benefit, we can look at The
NEC, which is commented on in the Grove Report, referred to below in footnote 5, in the following manner:
“The NEC is said to have introduced a variant of the management standard which might be called the
philosophy of incentive. The postulate is that risks should be placed on the party most in need of incentive
(presumably already with the ability) to prevent and control them. This is thought to motivate people to play
their part. An examination of the ‘compensation events’ listed in the NEC does not, however, demonstrate that
this philosophy has been uniformly applied.”
5 “The Grove Report: Key Terms of 12 Leading Construction Contracts Are Compared and Evaluated”, published
in September 1998 and is available on the web site of Thelen Reid & Priest at www.constructionweblinks.com.
Nael G Bunni
38
Risk Management
in Hong Kong, which focused on the report and related issues.6
It might be worth noting in this connection that if risks are not allocated in a
contract and a dispute arises between the parties to that contract as to whom a
particular risk is allocated, then an arbitrator or a judge would most likely examine
the following criteria for risk allocation and determine the dispute accordingly:
• which party could best foresee that risk?
• which party could best control that risk and its associated hazard or hazards?
• which party could best bear that risk?
• which party most benefits or suffers when that risk eventuates?
There are examples and legal judgments in respect of events, in which the liability
was allocated in accordance with each of the above criteria.  However, the allocation
in construction contracts of the risks is traditionally based on a sharing between
the parties involved, in accordance with the provisions of two contracts usually
executed between the Parties to a construction contract: The first is between the
employer/owner and the design professionals involved; and the second is between
the employer/owner and the main contractor. From the latter agreement, flows
another line of risk sharing between the main contractor, on the one hand, and
sub-contractors, suppliers, manufacturers, insurers and others, on the other hand.
If these risks are analysed on the basis of the effect they generate once they
eventuate, two basic types of risk can be identified. The first type incorporates
the risks which could lead to damage, physical loss, or injury and the second type
incorporates risks which could lead to economic and/or time loss. In both types
of risk, the risks allocated to the employer/owner are specified and the remaining
risks are allocated to the contractor.
Examples of the first type of risk, which involves damage, physical loss or injury,
include defective design, defective material, defective workmanship, Acts of God,
fire, human error and failure to take adequate precautions. Examples of the second
type include late possession of the site, delay in receipt of information necessary
for timely construction, changes in design, and variations to the original contract.7
The treatment of these two types of risk in construction contracts differs in that
the first type encompasses mainly insurable risks, which are required to be insured,
whereas the second type involves, in essence, uninsurable risks.
Unfortunately, the division of risk as referred to above is not clearly and explicitly
explained in a number of the well known standard forms of contract, a problem
6 A conference in Hong Kong held in November 2000, details of which were given by Humphrey Lloyd in the
International Construction Law Review, [2000] 2 ICLR 302.
7 Nael G Bunni, “Construction, Insurance and Law”, a paper delivered at the Conference on Structural Failure,
Product Liability and Technical Insurance, Technische Universitat, Vienna, 1989, and published subsequently in
Forensic Engineering, V. 2, Nos. 1/2, page 163, 1990.
39
that has resulted in major misunderstandings. As an example, the wording of
Sub-clause 17.1 of the new suite of FIDIC’s forms of Contract, published in September
1999, should have started by explaining that the risks included under Clause 17 of
the Conditions are only those risks of loss and damage and not the whole spectrum
of the risks to which the project and the parties involved in it are exposed.  The
term ‘Employer’s Risks’ in the context of this clause should have been replaced by
‘Employer’s Risks of Loss and Damage’, since these risks are confined to those
which lead to some form of accidental loss or damage to physical property or
personal injury, which in turn may lead to economic and/or time loss risks, directly
or through the other clauses of the contract.
As this explanation is not stated in the Conditions, the mistake of referring to the
risks under Clause 17 as ‘Employer’s Risks’ could lead to serious danger in that
the reader, and of course the user, will conclude that having identified in Clause
17 the Employer’s Risks, all the other risks are the Contractors’ risks, including the
contractual risks in the remaining provisions of the contract.
This problem can be highlighted by reference to Clause 17 of the Orange Book,8
where the draftsman fell into that trap and stated expressly in Sub-clause 17.5
that “The Contractor’s risks are all risks other than the Employer’s Risks listed in
Sub-Clause 17.3”. This mistake has led to many instances of misunderstanding,
conflict and at least one serious arbitral proceedings, where the employer pointed
out that by sub-clause 17.5 he bears no risks under the contract other than those
specified in sub-clause 17.3 9.
The same could be said about other well-known forms of contract.
Responsibility and Liability
Whatever the rules or the reasons for allocation of risks, the responsibility and
liability attaching to these risks, when they eventuate, follow and flow from that
allocation. Accordingly, the simplicity and clarity of the wording where such
allocation is made is of paramount importance. This means that the contractual
arrangements, the legal rules of the applicable law of the contract, and the technical
documentation such as any specification and drawings, must be clearly stated
and fully understood.
Once liabilities are assigned through the contract documents, the parties involved
have the following options to finance the consequences of risks should these
risks eventuate:
(a) To retain the responsibility for financing the costs of loss or damage or injury
by providing any one or a combination of the following arrangements:
8 The draftsman of the new suite of FIDIC’s contracts, published in 1999, applied the same format of the 1995
Orange Book to these new forms.
9 Nael G Bunni, “FIDIC’s New Suite of Contracts – Clauses 17 to 19: ‘Risk, Responsibility, Liability, Indemnity and
Force Majeure’”, ICLR, Vo. 18, Part 3, July 2001.
Nael G Bunni
40
Risk Management
(i)  an element of their cash flow;
(ii) reserves created specifically for the purpose;
(iii) funds assigned;
(iv) creating captive societies.
(b) To transfer the responsibility for financing the costs of loss or damage or
injury or non-performance to:
(i) another party to the contract by agreement, thus creating a sharing of
risks;
(ii) an insurer through an insurance contract that in turn becomes transferred
to reinsurers through reinsurance arrangements. An insurer may impose
his own risk management conditions, thus creating another cycle of transfer.
This second cycle of transfer, which is enforced through either an incentive
in premium reductions, or conditions attached to the insurance policies
may result in:
— the insured having to take measures to eliminate or mitigate a certain
risk;
— the insured having to retain part of the responsibility by the imposition
of a deductible or excess at the lower end of the scale or a limitation
of the part insured at the upper end of the scale;
— the insured having to retain certain risks through exclusion clauses
in the insurance policy; or
— the insured having to seek another insurance cover from a different
insurer.
Indemnity and Insurance
Generally, liabilities arising from the duties and obligations of the parties to a
contract should be covered by indemnities given by one party to the other, or
provided in the form of insurance policies.
Risk, Responsibility, Liability, Indemnity and Insurance in the FIDIC’s New Red,
Yellow and Silver Books
One of the common features of all the three new Books of FIDIC is the section on
Risk & Responsibility, Insurance and Force Majeure.  The wording of Clauses 17,
18 and 19 in the three main contracts (The New Red; New Yellow; and Silver
Books) is very similar.
It differs only in the text shown in Tables 1 to 3, which provide a comparison
between the wording of these Clauses, using the new Yellow Book as a base-line.
41
No. Clause No. Yellow Red Silver
1 17.1 (a) "...by reason of the
design, execution."
"...by reason of the
Contractor’s design (if
any), the execution..."
Same as Yellow.
2 17.1 (b) (i) "...by reason of the
design, execution..."
"...by reason of the
Contractor’s design (if
any), the execution..."
Same as Yellow.
3 17.1 (b) (ii) "...breach of the
Contract by the
Contractor, the
Contractor’s
Personnel, their..."
Same as Yellow. "...breach of the
Contract by the
Employer, the
Employer’s Personnel,
their..."
4* 17.3 Risks referred to in
Sub-Clause 17.4 are
numbered (a) to (h)
 inYellow.
Same as Yellow. Risks (f), (g) and (h) do
not appear in Silver.
5 17.4, first
paragraph
"...give notice to the
Engineer and shall
rectify this loss or
damage to the extent
required by the
Engineer."
Same as Yellow. "...give notice to the
Employer and shall
rectify this loss or
damage to the extent
required by the
Employer."
6 17.4, second
paragraph
"...give a further notice
to the Engineer and
shall be..."
Same as Yellow. "...give a further notice
to the Employer and
shall be..."
7* 17.4 (b), last
sentence
"In case of sub-
paragraphs (f) and (g)
of Sub-Clause 17.3
[Employer’s Risks],
reasonable profit on
the Cost shall also be
included."
Same as Yellow. Does not appear in
Silver.
8 17.4, last
paragraph
"...this further notice,
the Engineer shall
proceed..."
Same as Yellow. "...this further notice, the
Employer shall
proceed..."
9 17.5(a) "... compliance with the
Employer’s
Requirements, or..."
"...compliance with the
Contract, or..."
Same as Yellow.
10 17.5, fourth
paragraph
"...in relation to (i) the
Contractor’s design,
manufacture,
construction or
execution of the
Works, (ii) the use of
Contractor’s
Equipment, or (iii) the
proper use of the
Works."
"...in relation to (i) the
manufacture, use, sale
or import of any
Goods or  (ii) any
design for which the
Contractor is
responsible."
Same as Yellow.
Table 1: Differences between the new Yellow Book compared to the new Red
Book and the new Silver Book — Clause 17 Risk and Responsibility
Most of the differences are either of a minor nature or due to the respective role
of the ‘Engineer’ or the ‘Employer’ in these Forms.
There are only two significant differences, which are marked with an asterisk.
Nael G Bunni
42
Risk Management
No. Clause No. Yellow Red Silver
1 18.1, second
paragraph,
second
sentence
"...by both Parties
before the date of the
Letter of Acceptance."
Same as yellow. "...by both Parties
before they signed the
Contract Agreement."
2 18.1,
seventh
paragraph,
last
sentence
"Whenever evidence
or policies are
submitted, the insuring
Party shall also give
notice to the Engineer."
Same as Yellow. This sentence does not
appear in Silver.
3 18.2, second
paragraph
"...damage caused by
the Contractor in the
course of any other
operations (including
those under Clause 11
[Defects Liability] and
Clause 12 [Tests after
Completion]."
"...damage caused by
the Contractor in the
course of any other
operations (including
those under Clause
11 [Defects Liability]."
"...damage caused by
the Contractor or
Subcontractors in the
course of any other
operations (including
those under Clause 11
[Defects Liability] and
Clause 12 [Tests after
Completion]."
5 18.4, second
paragraph
"The Employer and
the Engineer shall
also be..."
Same as Yellow. "The Employer  shall
also be..."
Table 2: Differences between the new Yellow Book compared to the new Red
Book and the new Silver Book — Clause 18 Insurance
No. Clause No. Yellow Red Silver
1 19.4, last
paragraph
"After receiving this
notice, the Engineer
shall proceed..."
Same as Yellow. "After receiving this
notice, the Employer
shall proceed..."
2 19.6, second
paragraph
"Upon such
termination, the
Engineer shall
determine the value of
the work done and
issue a Payment
Certificate which shall
include:"
Same as Yellow. "Upon such termination,
the Employer shall pay
to the Contractor:"
Table 3: Differences between the new Yellow Book compared to the new Red
Book and the new Silver Book — Clause 19 Force Majeure
43
see definitions on page 44
Risks in Construction
Identify, analyse and allocate risks to the parties
Risks of loss or damage
(clauses 20 & 65) Economic and time risks
Emloyer’s risks
(specified)
Contractor’s risks
(all others)
Required to be
insured under
the contract
Insurable risks
but not required
to be insured
Uninsurable
risks
See Figure 2
DIC P&ELPI
CAR TPL EL Excess
Figure 1:  Indemnities and insurances relating to risks of injury and
damage under FIDIC’s major forms of contract
Economic and Time Risks
Employer’s risks
(specified)
Contractor’s risks
(all others) For example:
Cl. 8 (1)
(8) [4.1]
Cl. 12 (1)
(12.2) [4.12]
Cl. 13
(13) [19.7]
Cl. 20 (4)
(20.4) [4.10]
Specified through the proviso in Clause 11 (1), (12.1) [4.10]
As provided in
Cl. 8 (1)
(12.1) [4.11]
Cl. 12 (1)
(12.2) [4.12]
Cl. 17
(17) [4.7]
Cl. 20 (1)
(20.1) [17.2]
Cl. 36 & 39
(36 & 39)
[7.1 & 7.6]
Numbers in bold refer to ICE
Numbers in (italics) refer to the FIDIC Red Book 4th Edn.
Numbers in [square brackets] refer to the FIDIC New Red Book 1999
Figure 2:  Employers’ and contractors’ economic and time risks
under FIDIC’s major forms of contract
Allocation of risks and their management
44
Risk Management
Ins.
Defective
design
Economic and Time risks
Employer’s risks Contractor’s risks
Delay & cost
over-run
Non-performance
Surety
Delay Patent defects Non-performance
SuretyExtra cost Latent defects
Some insurance
Figure 3:  Indemnities and insurances relating to reconomic and time
risks under FIDIC’s major forms of contract
Notes to the Figures
1 Definitions of insurance acronyms (Figure 1, page 43)
CAR: Contractor’s All Risks
TPL: Third Party Liability
EL: Employer’s Liability
PI: Professional Indemnity
DIC: Difference-in-Conditions
P&EL: Public Liability and Employer’s Liability for the Owner/Employer
2 Copyright Credits
Figures 1 & 3: The FIDIC Form of Contract, 2nd edn., 1997, by Nael G Bunni, published
by Blackwell Science
Figure 2: Risk and Insurance in Construction, 2nd edn., Taylor & Frances Books Ltd, in
press
45
Part 2: Risk and Project Management
Jason Le Masurier
Introduction
This section focuses on the risks that arise as a result of the way a project is
managed. This analysis is based on the premise that project management is, in
itself, a risk management activity, rather than the commonly held opposite view,
that risk management is only one aspect of project management. In particular,
the relationships that develop on a project, heavily influenced by the type of
contract, can pose a significant risk to the success of a project. Management of
these risks relies on a robust feedback process and a technique is proposed,
derived from geotechnical engineering, which allows all project uncertainties to
be managed in an integrated way.
Cultural and Organisational Risks
The risks associated with adversarial relationships on a project are real, but do
not receive the same attention as other risks that are generally covered in a
contract. The results when such risks eventuate can be described as ‘Organisational
accidents’. Organisational accidents are defined by Reason10 as accidents that
“have multiple causes involving many people operating at different levels of their
respective companies” in contrast to individual accidents in which “a specific
person or group is often both the agent and victim of the accident”.
If instead of ‘accident’ we substitute ‘risk’, we can define individual risks as those
that are generally covered in the contract, whereas ‘organisational risks’ are those
that are inherent to the project culture and can result, in part, from the contract
itself. Another way to distinguish the two types of risk is in terms of the ability of
the project team and their organisations to directly control them.  Individual risks
are beyond the direct control of the project players and can generally be allocated
under the contract (in Part 1, Bunni sub-divided these risks into insurable and
uninsurable). Organisational risks are, in contrast, controllable by the project
players and their organisations.
Clearly there is a link between the two types of risk, in that failings in the project
organisation or management will create conditions under which individual accidents
are more likely to occur. Reason refers to ‘latent conditions’ which “arise from
strategic and other top-level decisions made by organizational managers. The
impact of these decisions spreads throughout the organisation shaping a distinctive
corporate culture and creating error-producing factors”.
The Heathrow Express, a link between London and Heathrow Airport, provides a
good example of the consequences of organisational risks in construction. In the
report on their investigations into the collapse of a tunnel during construction,
10 James Reason,  Managing the Risks of Organisational Accidents, Ashgate Publishing, UK, 1997.
46
Risk Management
the UK Health and Safety Executive (HSE)11 concluded:
“the incident exhibited all the hallmarks of an ‘organisational
accident’; that is, a multiplicity of causes led to the position where
systems variously used by the client, designers and contractors failed
and a major accident adversely affecting the safety of a large number
of people occurred. There were undoubtedly human errors, but these
were merely a consequence of foreseeable organisational failures.
The causes of the incident were rooted in failures in ‘defensive’
systems that did not adequately deal with hazard identification, risk
avoidance and reduction, and the control of remaining residual risks.”
A key word here is ‘systems’. We are considering the risks associated with an
entire system, whereas the traditional view of risk management focuses on the
individual parts of the system; in philosophical terms, the distinction is between
a reductionist and a holistic approach. The importance of systems thinking in risk
management has been stressed previously.12
Measurement of Risk
Risk is defined as the product of probability and consequence. If a culture of
conflict is considered to be a failure in an organisation, when we refer back to the
1980s and early 1990s in the UK construction industry, the prevalence of
confrontational relationships suggests that organisational accidents were almost
a certainty on construction projects procured under the lowest bid system. The
common occurrence of contractual claims, and occasional associated litigation,
provides further evidence of the likelihood of organisational risks eventuating
under unfair contractual relationships.
The consequences of organisational accidents vary. One consequence, as discussed
by Stockman13, is the adverse effects on the health of the people involved in the
project. In extreme cases the consequence of organisational accidents can be
catastrophic project failures and/or company bankruptcy, as the Heathrow Express
project and the Kariba Dam project demonstrate (see Chapter 10).
In terms of the categories of loss given by Bunni in Part 1, the losses associated
with organisational accidents come high on the scale. Cost overruns on adversarial
construction projects, which can be attributed to ‘organisational accidents’, have
been commonly 10%-20%, and sometimes much more, putting such ‘accidents’
into category 5-6 on Bunni’s scale. There was, and in some cases still is, a certain
inevitability with such project cost overruns, so failures of projects in this way
were not recognised as ‘accidents’. Major failures, such as the Heathrow Express
and Kariba Dam, would be more easily recognised as accidents, in category 10 on
Bunni’s scale.
11 Health and Safety Executive, The collapse of  NATM tunnels at Heathrow Airport,  HMSO, London.
12 David Elms, “Risk Management - General Issues” in Owning the Future: Integrated Risk Management in
Practice, Centre for Advanced Engineering, Christchurch, 1998.
13 see Chapter 8.
47
When one considers the lengths taken to mitigate far lesser risks through contracts,
the benefits of considering organisational risks in the same way as individual
risks becomes apparent. The rewards from preventing an organisational failure
can be much greater, for example, than the rewards from mitigating project delays
— typically, far more energy is spent on the latter than the former.
Managing Risks through Contracts
The role of the contract in risk management is covered in Part 1 and extensively
throughout the book, but it is worth noting here in the context of organisational
risks, the key influence of the contract. A fair contract can be a contingency plan,
providing a basis for equitable sharing of risks and, for example in the NEC,
detailing the processes required to resolve differences between the parties.
Conversely, an unfair contract can itself be a major hazard to the project. Contracts
that seek to protect the project owner from every individual risk will expose the
project and ultimately the owner to greater organisational risks due to the
engendered animosity. This is a concept also presented by Reason (see footnote
11) under the heading of ‘dangerous defences’:
“Defences designed to protect against one kind of hazard can render
their users prey to other kinds of danger, usually not foreseen by
those who created them, or even appreciated by those who use
them. In short defences can be dangerous.”
Once the concept of organisational risks has been accepted by a project team,
then subsequent risk assessment would include assessment of the likelihood and
consequence of a breakdown in communications and cooperation between the
parties on the project and development of mitigation measures. This aspect is
developed in the next section.
Managing Risk by the Observational Method
The Observational Method is an example of a particularly effective reaction to the
concept of ‘dangerous defences’, as discussed above, practised in some sectors
of geotechnical engineering for many years, which provides a model that can be
applied to the management of a diverse range of risks on a project.
Ground conditions account for the largest element of technical and financial risk
in civil engineering projects.14 Uncertainty in the ground conditions derives from
a lack of knowledge of both the exact location and the mechanical properties of
all the geological materials present on the site. Faced with this uncertainty, the
common approach, known as ‘predefined design’, is to attempt to eliminate the
uncertainty by assuming the worst possible conditions, derived from the data
available prior to construction.
14 Whyte, I L  and Tonks, D M . (1994),  “Project risks and site investigation strategy”, in Risk and Reliability in
Ground Engineering (ed. B O Skipp), Thomas Telford, London.
Jason Le Masurier
48
Risk Management
This conservative approach is a ‘dangerous defence’ since the project progresses
on the basis that every eventuality is covered, leading to complacency, which may
be shattered if ground conditions transpire to be even worse than the designer’0s
assumed ‘worst possible’. Hence, predefined design leads to poor value, either
solely due to the wasted resources of over design or with the additional extra
costs of dealing with ‘unforeseen ground conditions’.
A number of designers have recognised the inadequacies of predefined design
and applied a more pragmatic approach, managing the uncertainty using the
Observational Method, as defined by Peck.15 This approach recognises that
uncertainty has two components, risk and opportunity — i.e. the ground conditions
could turn out to be better than expected, or worse.
An Observational Method design is based on the assumption that the ground
conditions will be near the average of the predicted conditions, but alternative
designs or contingency measures are prepared in case conditions should turn out
to be worse than predicted. During the design implementation a rigorous monitoring
and observation strategy is used to check and confirm the actual conditions
found during construction. Performance indicators are selected for monitoring,
related to the critical risks. For example ground settlement may be monitored
when loading on the ground is increased or during adjacent excavations.
In the light of the information on the actual ground conditions gathered during
construction, the design can, if necessary, be modified in a timely way, either to
take advantage of better than expected conditions or to avoid problems which
might develop due to worse than predicted conditions. The main advantage of
this approach is the ‘finger on the pulse’ from monitoring, which means there
should be no surprises.
To ensure success of such a flexible design approach, the processes of design
and construction need to be integrated and close co-operation is required between
all those involved in the design and construction process. This brings us back to
the project culture discussed earlier, since project relationships based on trust
and cooperation are even more important when using an Observational Method
than with a predefined design.
The Heathrow Express project mentioned above illustrates this point very well.
The New Austrian Tunnelling Method (NATM) used to construct the project tunnels
is a variant of the Observational Method. The basic steps are to excavate the
tunnel, install a primary lining and then monitor movements in the tunnel walls.
If movements are within acceptable limits then no further support is required, but
if excessive movements are detected then additional support is installed.
Progressing in this manner, efficiencies can be made by tailoring the lining to suit
the actual conditions found and by modifying the excavation sequence.
15 Peck, R B (1969),  “Advantages and limitations of the observational method in applied soil mechanics”,
Geotechnique 19 (2).
49
The initial impression may be that this is less safe than the predefined design
approach, particularly in view of the collapse of the NATM tunnels at Heathrow.
However, the NATM and Observational Method are inherently safe when carried
out correctly, since the monitoring will give early warning of problems, allowing
contingencies to be implemented in a timely way. Of course, there is an over-
riding proviso that contingencies are able to be mobilised in time, so, for example,
this approach is not applicable when failure mechanisms are brittle.
The HSE investigations into the collapse of the tunnels at Heathrow (footnote 11)
vindicated the NATM but found that it had not been applied correctly:
“The design economies meant that greater care was needed during
construction and monitoring. However the design did not fully specify
what monitoring regime was required nor set out predefined trigger
levels and the design did not fully consider what contingency actions
might be required to secure continued stability in the event of
difficulties during construction.”
In fact there was plenty of monitoring being done, but due to the contractual
pressures on the people involved, the impending collapse was not detected.
Analysis of the data during the HSE investigations showed that signs of the
developing failure were present weeks prior to the actual collapse. The role of the
contractual arrangements in contributing to the collapse are summarised in Box 1.
As highlighted earlier, the failure of the tunnel at Heathrow was described by the
HSE as an ‘organisational accident’. The project team had suffered a severe failure
but the same people were able to overcome the problems and through a culture
change exercise, documented by Lownds16, they went on to establish a benchmark
for collaborative working in construction, and, despite the severe setbacks, delivered
the project only nine months late. A contribution to the post-collapse success was
the use of an Observational Method design for the recovery work excavations.17
This begs the question: How did the same team fail so spectacularly to manage
the risks using NATM prior to collapse and then use the same risk management
approach, the Observational Method, so effectively subsequent to the collapse?
The answer lies in the culture change.
A key point illustrated by the Heathrow Express project is that, when using an
Observational Method, the behaviour of the project team is a greater risk to the
project than the ground conditions. The author has carried out research into the
Observational Method process18 and developed a model that allows an
16 Lownds, S (1998), Fast track to change on the Heathrow Express, Institute of Personnel and Development,
London.
17 Powderham, A J and Rankin, W J (1997), “Heathrow collapse recovery solution cofferdam - planning design and
implementation”, in: Proceedings of International Conference on Foundation Failures, 1997.
18 Le Masurier, J W (2001), “Developing the Observational Method as a systemic approach to uncertainty
management”, PhD thesis, University of Bristol, UK.
Jason Le Masurier
50
Risk Management
integrated approach to the management of all project risk, as described in the
next section.
A New Approach to Uncertainty Management Afforded by Collaborative Working
Whilst the Observational Method is recognised as a particular approach to
geotechnical design, as discussed in the previous section, it is in fact generic,
based on the feedback loop shown in Figure 1, and people use this method
instinctively to manage uncertainty in everyday life — driving a car for example.
The basic principle is that in any process where there are uncertainties, the most
efficient way to manage the uncertainties is by monitoring performance of the
process, considering options and taking corrective action when necessary. The
alternative approach, commonly used in construction, is to try and eliminate
uncertainty.
Box 1: Results of the investigation into the Heathrow Express
tunnel collapse (see Footnote 11)
The Contract
The contractual arrangements involving the assignment to the
contractor of the process risks from using the NATM and settlement
control, the self-certification of quality, and the separation of the
design of the permanent and NATM works meant that the parties
had to deal with a number of significant issues.
The chosen approach substantially transferred the process risks
connected with the use of new technologies from the client to the
contractor and this limited the opportunities for direct intervention
by the client team.
To some degree there was a contradiction in the contractual approach.
The client chose to let the contract through a traditional competitive
tender but had the expectation that self-certification, a cutting-edge
approach more closely aligned with new forms of contracting, would
provide for quality. Likewise, the advantages accruing from greater
integration of the temporary and permanent works design were lost.
The contractual arrangements meant that the two designs were
separately developed by the two design teams.
Breaking the link between the design of the permanent and temporary
(i.e. NATM) works created difficulties in taking an integrated design
approach to risk reduction. The separation reduced the permanent
works designer’s interest in the impact that the permanent works
had on the temporary works; and, likewise, it limited the temporary
works designer’s ability to influence the permanent design.
51
Extending the observational method model to the generic case, the performance
indicators chosen for monitoring will be derived from the objectives of the process.
In the geotechnical case the objective may be to limit settlement. In other cases
the objective may be to limit environmental impact or to delight the customer.
Many projects will have a whole range of interrelated objectives, which could
include, for example, the three just mentioned. The model proposed by the author,
referred to as ‘observational engineering’, is one that allows all project objectives
and uncertainties to be managed in an integrated way.
In any construction process, behaviour of the project team members is a significant
uncertainty and, therefore, in observational engineering, performance of the team
would be monitored and used to provide feedback to the members — for example
‘team spirit’ could be a key performance indicator. Measuring these ‘soft’
performance indicators is clearly more difficult that the traditional physical
measurements, as used in geotechnics, but it is precisely these human factors
that are crucial for success, as illustrated by Heathrow Express. Interest is increasing
and progress is being made in measuring such ‘soft’ indicators in the construction
industry19, for example using questionnaire techniques.
The observational engineering methodology is based on applying the principles
of the Observational Method at various levels — at the traditional level to manage
uncertainties in the ground and at the organisational level to manage human
uncertainties. Since clarity and agreement over roles and responsibilities are crucial
for success, processes need to be designed by all involved using process models,
ensuring contingency plans for all project scenarios are in place from the start.
The process models are thus an integral part of the process; if there is a mismatch
between the actual process and the model, either the model needs to change or
the actual process needs to change — in either case the agreement of the team
is required.
Perception
Action Reflection
Figure 1: Basic feedback loop for managing uncertainty
19 see for example Demonstration Project 120 and 225 at www.m4i.org.uk
Jason Le Masurier
52
Risk Management
The observational engineering model is shown in Figure 2 and explained as
follows. Starting at the bottom of this picture, observational engineering is founded
on a cohesive project team. The project team collectively agree on and work
towards a set of common project objectives; the team then design the processes
required to reach the objectives and capture these in a process model. A range of
performance indicators, based on the project objectives, is associated with each
of the project processes, shown at the top of the picture. The actual values of
these performance indicators are monitored as the project progresses and reviewed
against a set of trigger value criteria. The data are fed back to the project team to
inform their actions within the continuing project progression. The team carry out
regular reviews that may result in modifications to the project objectives and/or
the project processes.
Contingency plans need to be in place, ready to be implemented if the project
deviates from its path to success. Examples of contingency measures for the ‘soft’
organisational risks, employed from the start on some partnering projects, include
open book accounting to instil trust, co-located offices to improve cooperation
and communications, incentives for all parties to identify opportunities and savings
and the employment of experienced facilitators to promote teamwork.
Some may say observational engineering is ‘common sense’, but so often in
Key Performance IndicatorsHard Soft
Time Cost Functionality People
% complete % budget spent
Material
wastage
Safety
Ground
settlement
Client satisfaction
Efficiency of
communication
Co-operation of team
P
ro
je
ct
 P
ro
gr
es
si
on
C
ontinuous im
provem
ent
F
eedback
Ac t ion
Moni tor ing
Checking
design
Designing
works
Identifying
next stage
Constructing
next stage
Checking
design 2
Reviewing
design
Deciding
actions
Monitoring
Client Designer Contractor Sub-contractor
Level 1
Level 2
Level 3
Level 4
Model of
the project
process
Shared Ob jec t ives
Figure 2: Observational Engineering model
53
construction this concept is not applied and, rather than progressively reduce
uncertainty through continuous feedback, attempts are made to hide, ignore or
eliminate uncertainty, or transfer responsibility for it to another party. When a
collaborative culture exists on a project, with amicable arrangements for sharing
the risk and reward associated with project uncertainties, then realistic assessments
of uncertainties are possible.
Since observational engineering recognises there is both opportunity and risk
associated with uncertainty, in order to be successful it must be applied under
contract terms that integrate the two; i.e. contracts that share risk and reward
fairly among the parties. In this situation, all parties have an incentive to sign up
to the process from the start and work towards common objectives. It will not
work under one-sided contracts that seek to separate risk and reward at the start
of the project. The problem with such contradictory contractual requirements is
clearly illustrated in the example in Box 1.
Establishing the Culture
As the Heathrow Express example illustrates, the project culture will be determined
by the particular contractual circumstances. Before the tunnel collapse the cultural
mind-set focussed attention on the apparent economies and the need for
production, rather than on  particular risks. After the collapse the team became
united in their objective to overcome the failure. Often a crisis can have this effect
of uniting previous adversaries (see also footnote 20). The question that follows
this observation is: Why wait for a project crisis to establish the favourable
culture, why not establish it from the start?
This question resonates throughout the book. For example partnering may be
established from the start of a project or develop when a need is felt among
certain parties (see Chapter 8). The parties engaged to resolve disputes can be
appointed from the start, or can be appointed once a dispute has arisen (see
Chapters 9 and 11). In all situations, the better result is obtained if the relationships
and culture are established by design, from the start, rather than developing in
response to a set of circumstances.
In this regard, the project owner has the greatest power to manage the risks of
organisational failures, through the method of procurement, choice of contract
form, equitable assignment of project risks and active promotion of a team approach
to project delivery, a point also made by Tuohey in Part 3.
Providing a project has been set up under contract conditions that seek to manage
the risks of organisational failure, it is the responsibility of all parties to ensure
that a cooperative culture is maintained. The greatest responsibility rests on
those at top levels of management, who should lead by example.
Jason Le Masurier
20 In the original paper on the Observational Method, Peck noted that the method is far more often applied as a
‘best way out’ rather than ‘ab-initio’.
54
Risk Management
55
Part 3: The Use of Risk Management
Processess in Construction Contracts
Patrick Tuohey
Introduction
Everyone is familiar with the management of risk — we all do it every day.
However, the formalised approach to risk management in a project environment
is relatively recent. The advent of the Australian and New Zealand Standard AS/
NZS4360:1999 has provided an accepted framework and methodology for the
management of risk across an entire enterprise. In relation to the development
and implementation of contracts in the engineering and construction industry, a
formalised approach to risk management can provide for an ‘optimum’ contract
form — one in which the risks are carried and hopefully managed by the party
most able to control and influence the outcome of the potential hazard of the risk
event.
This paper describes the risk management process inherent in AS/NZS4360:1999,
looks at how the process can best be used in the development and implementation
of contracts in the engineering and construction industry, and examines how
these processes are currently being employed in the resources sector in Australia
and elsewhere.
Australian /New Zealand Standard 4360:1999
The Australian/New Zealand Standard 4360:1999 defines Risk Management as “...
a generic framework for establishing the context, identification, analysis, evaluation,
treatment, monitoring and communication of risk.” The Standard is not prescriptive,
but rather describes the systems and processes required for risk management in
any field of endeavour. The use of AS/NZS4360:1999 as an integral element of
‘good management practice’ across an enterprise, and in particular in matters
relating to corporate governance, makes the Standard an ideal choice as the
framework for project risk management. It means that a uniform, structured system
can be used across an organisation, and that corporate management can better
understand risk issues on individual projects, as well as across all projects.
The Risk Management Process
In a formal workshop session, the key project and other relevant corporate players
are assembled to identify the risks to the project’s success. The initial workshops
are conducted as early as possible in the project life cycle, and follow-up workshops
are conducted at regular intervals.
The process concentrates on a qualitative assessment of the project risks, and
the development of a Risk Management Plan to manage and control these risks.
56
Risk Management
The process involves the following steps.
• Establish the Context
— the formal description of the context under which the risk session will proceed:
a written statement is agreed up-front by the players on the precise purpose
of the session.
— the identification of the key stakeholders in the project: typically, the key
stakeholders encompass a much broader group than the direct contract
holders.
— the identification of key success factors for the project and of the needs of
the key stakeholders: by definition, a risk is anything that impacts on these.
• Identify Risks
— a brainstorming session in which all possible project risks are identified and
logged, without reference to any evaluation criteria — an ‘anything goes’
forum. It is recognised that no single party is the fountain of all project
knowledge, and every participant has useful information to add to the forum.
— as a safety net under the brainstorming session, a series of key-word checklists
are presented to the session to uncover additional risks.
• Analyse Risks
— the risks identified are now categorised into broad ranges, based on a
consequence-likelihood matrix against criteria — numerical ranges are used
for both the consequence of a risk occurring, and the likelihood of it occurring.
• Evaluate Risks
— the risk matrix provides a severity ranking of each risk into (a) extreme; (b)
high; (c) moderate; and (d) low categories. Generally, extreme and high risks
require immediate attention, while moderate and particularly low risks may
be accepted without treatment.
• Treat Risks
— for extreme and high risks, a treatment plan is established in order to mitigate
the risk. Possible ways to treat risks include (a) reduce the consequence of
occurrence; (b) reduce the likelihood of occurrence; (c) reduce both the
consequence and likelihood; (d) transfer risk to another party; (e) avoid risk;
and (f ) accept risk.
— as an outcome of the risk treatment plan, a risk action plan is agreed describing
the required action, action parties and schedule for action completion. It is
crucial to ensure that the team does not attempt to solve all the issues at
57
Patrick Tuohey
this forum — there is generally a tendency in this direction. Rather, the key
focus is for the team to imagine ways in which a risk may be treated, and to
devise possible actions. A later investigation by the project team will determine
if a proposed action is indeed beneficial and cost-effective.
• Communicate and Consult
— the Risk Management Plan is communicated throughout the project team, to
get buy-in and agreement at all levels.
• Monitor and Review
— the Risk Management Plan becomes an on-going strategic project management
tool, and is kept alive throughout the performance of the project.
The Risk Management Process in Contract Formation
All contracts are vehicles for the allocation of risks between the contracting parties.
Contract negotiation is a process for the allocation of risks. At any given time in
the project development cycle, there is a discrete, yet generally indeterminate,
quantum of risk. For every potential hazard to the achievement of the desired
outcomes of a project, there is a risk premium — the amount of money that a
party (including third parties, such as insurers) is prepared to be paid for taking
on that risk. The theoretical optimum allocation of risk in a contract is that point
where the sum of the risk premiums is minimised — where each party takes on
the risks for which it is best placed to control and manage those risks.
The risk management process described above provides the forum for parties to
jointly identify and evaluate the risks to a project, and subsequently to allocate
those risks in an efficient manner. A risk allocation matrix is typically used to
document this process, whereby the risk events, the proposed controls and the
responsible party are tabulated for all risks identified. Ideally, such a process
provides an analytic forum in which the negotiation process can be undertaken,
largely divorced from emotional factors. There is a significant body of literature in
this regard (for example, see footnotes 21 and 22).
Current Practice in Contract Formation
While the theoretical position is well established and generally understood, how
does industry actually perform against the optimum risk target? A recent report by
the Victorian Government23 gives some interesting insights into the strategic
decision-making by various parties in the allocation of risk in public projects.
21 Zack, James G, “Risk Sharing - Good Concept, Bad Name”, AACE Transactions, 1995.
22 Jergeas, George F and Francis T Hartman, “A Contract Clause for Allocating Risks”, AACE Transactions, 1996.
23 Victorian Government, Department of Treasury and Finance and the University of Melbourne, Department of
Civil and Environmental Engineering, Private Provision of Public Infrastructure: Risk Identification and
Allocation Project, 1999.
58
Risk Management
A factor which tends to defeat the efficient allocation of risk in construction
contracts is that the Principal (or Owner, Employer, Company, etc) may have
significantly more power at the contract formation stage than does the contractor.
This power derives from (a) the competitive bidding process, with unreasonable
time pressures on the contractor and often involving a large number of bidders;
(b) in-house risk management and legal expertise which greatly exceeds that of
the contractor; and (c) a general reluctance (perhaps born of ignorance) by
contractors to price adequately for the risks they are being asked to take on.
However, who is the winner in this power game? At first glance one might be
tempted to believe that the Principal will always win. However, history shows that
when projects fail, all parties are liable to be affected detrimentally. For example,
if a Principal is stuck with a poorly-performing process plant, its economic
performance will be inhibited long after the project (and perhaps the contractor)
is finished.
The joint use of formalised risk management processes provides all parties with
a way out of this bind. Indeed the author has been involved in a number of
contract negotiations where the use of the formalised risk management processes
described here has resulted in a revised contract form of significantly greater
benefit to both contractor and Principal.
However, such occurrences are still unusual. Most contracts are drafted unilaterally
by the Principal, and risks are allocated without the benefit of these risk
management processes. Some of the more common approaches are as follows.
Large, multinational companies
Despite a good understanding and a general utilisation of the principles of risk
management processes, there is an increasing tendency for large, multinational
operating companies to draft one-sided contracts with an inordinate and
inappropriate concentration of risk placed with the contractor. In subsequent
negotiation, the representatives will use phrases such as “your competitors are
prepared to accept these conditions” and “trust me, our legal people need to
have these terms, but the project team will never use them”. A recent draft
contract reviewed by the author required the contractor to take responsibility for
consequence damages, including the cost of delays to production — a position
no contractor could ever accept. One wonders if such an approach by the legal
departments of large companies is producing tender prices which are elevated
across the board.
Privately funded projects
Many major resource industry projects in Australia are promoted by smaller
corporate owners, using project-specific financing from banks and other financial
institutions. This leads to the financiers having a major input to the forms of
contract, possibly without an understanding of the complexities of the technical
factors of the project. Banks seem to have a curious attitude to risk — it is
59
Patrick Tuohey
essentially a problem for someone else. There appears to be little incentive for
the financial institutions to seek optimum risk allocation. As would be expected,
such an environment produces high risk premiums from contractors, and
consequently inefficient project outcomes.
Lump sum EPC projects
In the resources industries, particularly in South East Asia and the Middle East,
there remains a tendency for major projects to be executed on a lump sum,
Engineer/Procure/Construct (EPC) basis. This can be an effective basis, so long
as there is adequate definition in project scope, and adequate time for contractors
to prepare prices. However, in many projects, lump sum EPC is used as the basis,
without enough up-front definition of the project, and consequently with a large
amount of change being required during the project execution. As would be
expected, such an environment is a recipe for disaster for all parties. Indeed,
there are recent reports that a number of the world’s largest engineering contractors
(among those who remain solvent) have made strategic decisions to avoid lump-
sum EPC work. Time will tell if this is a temporary adjustment only, or if more
enlightened contract models will evolve.
Alliance model
Over the past ten years, there has been a major push into the development of
alliance-type contractual relationships, both for major projects and for on-going
engineering and construction maintenance and minor project activities. A key
factor driving this push was the Cost Reduction in the New Era (CRINE) initiative
emanating from the offshore oil and gas industry in the North Sea. In alliance-
type contracts there is a genuine attempt to find the optimum risk allocation
within the project, with a particular focus on the alignment of economic goals
between the parties, so that everybody wins when the project wins, and everybody
hurts when the project fails.
In practice, there have been a number of issues in the execution of alliance-type
contracts, as follows: (a) the risk/return ratio can be such that the rewards to the
contractor are low, particularly if the contractor is required to have some of its key
people tied up in the alliance for extended periods; (b) the integrated team
environment can be quite stressful for people; and (c) the nature of long-term
alliance contracts is that there is one winner only, with the consequence that
there is the potential for competition in the market to be reduced, particularly in
thin markets like Australia.
Overall Project Risk Management
The contract is a crucial and important document for a project, ideally describing
accurately and clearly the agreed risk allocation between the parties. It should
help to drive the performance of all parties in the direction of a successful outcome.
However, the risks to a project go beyond the terms and conditions of the contract
60
Risk Management
binding the main parties. For example, major risks typically assumed by the
contractor such as labour disputes, escalation of costs of labour and materials
and delayed delivery of long-lead items, are often those areas where the real
effort in project management needs to be extended. Similarly, risks to the Principal
such as product market conditions, regulatory approvals and management of
stakeholder expectations, are critical areas outside of the contract where constant
attention needs to be maintained to achieve a successful project.
In recent years, there has been a significant drive to develop processes for overall
project risk management, taking a holistic view of the dangers to the achievement
of successful project outcomes, and developing formalised structures for managing
those risks. As described above, the process that Worley uses is based broadly on
AS/NZS 4360:1999, fast becoming an international standard in risk management.
The process is also consistent with project-based risk management processes,
such as Risk Analysis and Management for Projects.24 Additionally, there are
many excellent publications which present processes and procedures for the
management of project risk. For example, the works of Chapman25 in this area
have been extremely useful.
In Australian government agencies, it is now a common requirement for the tenderer
to include with his tender a draft risk management plan for the entire project —
it is easy to believe that in the near future, risk management will become a
necessary, formal process in the execution of all projects. Projects will be more
likely to succeed as a result.
Conclusions
Formalised risk management processes such as those proposed by AS/NZS
4360:1999 provide an advanced technique for the identification, evaluation and
treatment of project risks. This process can then be used for the development of
an efficient contract form, based on the allocation of risk to the party best suited
and able to manage and control the risk. While there is some evidence of the
successful use of these principles, the resources industries still tend to use contract
models which deviate from the theoretical optimum. However, the same risk
management processes are being used to develop a holistic treatment of risk
across an entire project, and this trend is expected to improve project performance.
Examples of Worley’s Project Risk Management process are given in Appendix A,
page 291.
24 Institution of Civil Engineers and the Faculty and Institute of Actuaries, Risk Analysis and Management for
Projects (RAMP), Thomas Telford, London, 2000.
25 Chapman, Chris and Stephen Ward, Project Risk Management – Processes, Techniques and Insights, John Wiley
and Sons, Chichester, 1999.
61
Nael G Bunni
Abstract
In September 1999 the International Federation of Consulting Engineers (FIDIC) issued a
new suite of Conditions of Contract. It was not just an update of the 4th Edition of the Red
Book and its companion forms for other types of project. The new documents departed
from the traditional style and structure, inherited from the Conditions of Contract of the
Institution of Civil Engineers, London. The clauses of the four principal contract forms of
the new set had now been drafted to suit the design approach followed: whether the
design would be carried by the Employer, by the Contractor, or whether the project would
be developed as a turnkey contract.
The new suite contains several other departures from the traditional conditions of contract:
the language is simpler, and certain concepts that previously had to be consigned to the
Conditions of Particular Application (Part II) have been brought into the core text. Also, and
most importantly, whilst the Engineer remains as an option in the traditional role of
decision maker and impartial primary adjudicator in disputes, the core text of the Red
Book clearly identifies him or her as a servant of the Employer, with contract supervision
functions as a delegate of the Employer. The primary role of impartial resolution of problems
and disputes is now given to a neutral person or panel: the Disputes Adjudication Board.
Nael Bunni (himself a member of FIDIC drafting committees) reviews the new suite of
Conditions of Contract and points out the principal areas where they differ from the past
issues of the FIDIC document. Readers should refer to the 4th Edition of the Red Book
(“FIDIC 4th”, first issued 1987, amended in 1988 and 1992, and issued with a supplement
in 1996) as the principal traditional form of construction contract to which the comparison
refers. Nael Bunni also points out certain problems of drafting that must be borne in mind
by any user of the new documents.
Readers familiar with the international development banks’ Standard (or Sample) Bidding
Documents (SBDs) should note that the current editions of these documents still include
FIDIC 4th (with the revisions of 1992) as the basic Conditions of Contract. The multilateral
development banks are working on production of harmonized standard documents. The
first such document is expected to be a Master Pre-qualification document, programmed
to be issued in September 2002; concurrently, work is being done on drafting a harmonized
SBD for Works. The drafting work includes consideration of whether to include the new
FIDIC documents in the harmonised SBD1.
5 The New Suite of FIDIC Conditionsof Contract: Significant Changes
Nael G Bunni
1 JJ Raoul, the World Bank, 21 May 2002
62
The New Suite of FIDIC Conditions: Significant Changes
63
Nael G Bunni
Introduction
In September 1999, the International Federation of Consulting Engineers, ‘FIDIC’,
published a new set of standard forms of contract alongside those that had been
in use at that time. The new set is made up of the following four contract forms:
• The Green Book: The Short Form of Contract — Agreement, General Conditions,
Rules for Adjudication and Notes for Guidance;
• The New Red Book: The Construction Contract, (Conditions of Contract for Building
and Engineering Works, Designed by the Employer) — General Conditions,
Guidance for the Preparation of the Particular Conditions, Forms of Tender,
Contract Agreement, and Dispute Adjudication Agreement;
• The New Yellow Book: The Plant and Design-Build Contract, (Conditions of
Contract for Electrical and Mechanical Plant, and for Building and Engineering
Works, Designed by the Contractor) — General Conditions, Guidance for the
Preparation of the Particular Conditions, Forms of Tender, Contract Agreement
and Dispute Adjudication Agreement; and
• The Silver Book: The EPC & Turnkey Contract, (Conditions of Contract for EPC
Turnkey Projects) — General Conditions, Guidance for the Preparation of the
Particular Conditions, Forms of Tender, Contract Agreement and Dispute
Adjudication Agreement.
Unlike the standard forms of contract that had been in use prior to September
1999, which were distinguished from each other on the basis of the type of
project to which they applied, the new forms are distinguished on the basis of the
allocation of the design function.
It is because of this new distinguishing characteristic that the New Red and New
Yellow Forms were not given a different colour, as FIDIC wished them to be
identified by their respective function of design rather than by their colour. However,
despite FIDIC’s wish, these documents are more easily identifiable by their colour
with the added tag of ‘old’ and ‘new’ and the past few years since their publication
date have proved that assertion.2  In any case, it is important to remember that,
although the new Forms of Contract have retained many of the principles and
concepts of the old Forms, the differences between them are too great to make
the new set a revision of the old. These differences are too numerous in format
and in concept and the New Red and New Yellow Books are not revisions of the
old Red and Yellow Books.
The New Red, New Yellow and Silver Books have been drafted with the same
format and to a large extent their text is similar in its wording. The draftsman,
however, pursued this desire for similarity in wording too far in certain instances,
2 It is indeed a pity that these new Contract Forms were not given new colours, which would have eliminated
the need for the added tag of ‘old’ and ‘new’. The drafting committee was advised to that effect by many
correspondents, but chose to ignore the advice.
64
The New Suite of FIDIC Conditions: Significant Changes
and thus has caused problems that should become obvious on close scrutiny.3
The format adopted for these new Forms of Contract is that of the Orange Book,
which had been published in 1995 for use in Design-Build and Turnkey projects.
The Orange Book is now obsolete, as it has been replaced by the New Yellow
Book.
The Silver Book is totally new and to a large extent forms a departure from FIDIC’s
established position of providing forms of balanced risk allocation. The risks in
the Silver Book are mostly allocated to the contractor. The Green Book is also a
new venture for FIDIC in that it is intended for smaller contracts of less than
US$0.5 million. Whilst the changes in format may not be sufficient to influence
one’s choice between the old and the new forms, the 18 significant changes in
concept would. These changes in concept will be discussed below and this chapter
will also review the logic and rationale behind the major changes.
Accordingly, it is appropriate to consider first the New Green Book and then deal
with the three new major Forms of Contract. It is also appropriate to consider the
New Red Book and the New Yellow Book together, leaving the Silver Book to be
discussed on its own.  Finally, having considered the significant changes, a set of
conclusions is drawn as to the value of these new forms of contract.
The New Green Book
The Green Book, as stated in its Forward, is intended to be used as a form of
contract for engineering and building work of fairly simple or repetitive work of
short duration with relatively small capital value,4 but it may be suitable, subject
to the type of work and circumstances, for contracts of greater value. The objective
of the Green Book is for the Contract to express in clear and simple terms traditional
procurement concepts.5
Furthermore, the form is drafted in a flexible format that includes all essential
commercial provisions and a variety of administrative arrangements. Thus, it is
envisaged that the employer may provide the design himself, by others on his
behalf, or by the contractor in a design/build format. In the latter situation, tenderers
would be required to submit a design with their tenders, which would be governed
by the provisions of clause 5 of the Green Book’s Conditions, “Design by Contractor”.
It is also envisaged that in the Green Book there would be no traditional “Engineer”
or “Employer’s Representative” in the formal sense used by FIDIC in most of its
other forms of contract. Instead, the employer takes over the functions usually
performed by the Engineer or the Employer’s Representative. However, the employer
may appoint an independent engineer to act impartially by modifying clause 3 of
3 For example, with the variations in the design function between the three new major Forms of Contract, there
should be different insurance requirements set out independently for each of them.  Furthermore, the
requirements in turnkey projects demand as a prerequisite the provision of additional insurance policies.
4 As stated above, it is suggested that the intended capital value is around US$0.5 million.
5 See the first line of the Notes for Guidance, which forms the last section of the Green Book.
65
Nael G Bunni
the Conditions “Employer’s Representative”.
These various options are explained at the end of the Green Book in a section
entitled “Notes for Guidance”, which do not form part of the Contract.6 Accordingly,
once the employer considers the options available to him under the Green Book,
he is guided to select what he needs and deletes what he does not, ending in a
contract form which crystallises his choice. The employer is then directed to
complete an appendix, which incorporates the characteristics of his chosen contract,
prior to inviting tenders. This appendix appears at the beginning of the Green
Book as part of the Agreement, which will be eventually signed with the selected
contractor.
The flexibility of the document is a significant feature of the Green Book, particularly
where insurance is concerned.  This is because the relevant clause, clause 14,
only specifies the general framework of the cover required, leaving the various
details to be completed by the employer in the Appendix with extensive freedom
to include any insurance requirement and in any detail he deems fit.
Having explained the general aspects of the Green Book, it is important to draw
attention to a serious problem with this new form of contract. It relates to its
mishandling of the topics of “Risk”, “Responsibility” and “Liability”.  In clause 13,
which is the relevant clause to the first two of these topics, we find no mention of
risk at all. In fact, other than in the title, the word “Risk” does not appear
anywhere in the Green Book. But, on close scrutiny, it becomes apparent that the
reference to an “Employer’s Liability” in the second paragraph of clause 13 is
intended to lead the reader to clause 6 of the form, where for some inexplicable
reason the draftsman refers to risks as liabilities.7
It must be said in this context that it is extremely peculiar that FIDIC, which
pioneered the adoption of the risk concepts in its various forms of contract,8 is
now turning the clock back with its Green Book and confusing risk with liability.
Even from a linguistic point of view, it is difficult to understand how one could
confuse risk with liability. They are two terms which are entirely different
etymologically, scientifically, legally and in every other sense. Risk is technically
defined as “A combination of the probability, or frequency, of occurrence of a
defined hazard and the magnitude of the consequences of the occurrence”. 9
6 Unlike FIDIC Contracts Guide for the major forms of contract in FIDIC’s 1999 Suite, which was published
separately during 2001, but was copyrighted in 2000, the Notes for Guidance of the Green Book were given in
the last section of the book itself.
7 This part of the paper is based on an article by the author, which is to be published in the International
Construction Law Review in Part I of the 2002 Volume.
8 The third edition of the Yellow Book and to some extent the fourth edition of the Red Book, both of which
were first published in 1987, were the first forms of contract that recognised the natural flow of risk to
responsibility to liability to indemnity to insurance.  See in this connection, Nael G Bunni, “The FIDIC Form of
Contract – 4th Edition”, Second Edition, Blackwell Science, 1997.
9 British Standard No. 4778: Section 3.1 - Guide to concepts and related definitions: 1991. The British Standards
Institution, Linford Wood, Milton Keynes, MK14 6LE, UK. In the same British Standard, the definition of ‘hazard’
is given as “A situation that could occur during the lifetime of a product, system or plant that has the
potential for human injury, damage to property, damage to the environment, or economic loss”.
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The New Suite of FIDIC Conditions: Significant Changes
Liability, on the other hand is defined as “the legal concept of one party being
subject to the power of another, or to a rule of law requiring something to be
done or not done. This requirement to do something or not to do it can be
compelled by legal process at the other party’s instance. It is sometimes called
subjection.” 10 Liability may arise either from a voluntary act or by force of some
rule of law. Thus, a person who enters into a contract becomes liable to perform
what he has undertaken, or to pay for the counterpart performance, or otherwise
to implement his part of the bargain.
Even if it were not wrong to use the term ‘risk’ and mean ‘liability’, and in the
writer’s view it is wrong, the substitution of ‘risks’ with ‘liabilities’ is a detrimental
step. The topics of risk and risk management are now part of a respected field of
science and their principles should be strengthened and enhanced rather than
diluted in any contract.
Moving on to the second paragraph of clause 13.1, the text presents us with an
equally serious problem and that is in respect of the gap created by the division
of risks (referred to as liabilities), between the employer and the contractor. The
employer is allocated the risks described in clause 6. The contractor is allocated
the risks of all loss or damage happening to the Works and of all claims or
expense arising out of the Works caused by “a breach of the Contract, by negligence
or by other default of the Contractor, his agents or employees”.
To whom then are the other risks allocated? The risks referred to here are the
risks that do not qualify within the meaning of an “employer’s risk”, nor can they
be described as “a breach of the Contract” by the Contractor.  This problem is of
a similar nature to that created in the three major forms of contract published by
FIDIC in 1999 through their Sub-clause 17.1(b)(ii) where the basis of indemnity is
negligence rather than legal liability.11 This gap in risk allocation ultimately creates
a gap in the insurance cover for the project, unless it is specifically dealt with in
the Appendix.
It must be said, however, that grouping in one clause, clause 6, all the Employer’s
Risks (provided they are properly identified as risks), including those that lead to
pure economic and/or time loss together with the others that lead to loss and/or
damage is a good idea.
This idea of grouping all the employer’s risks in one clause is now adopted in the
latest of the published FIDIC’s forms, the Form of Contract for Dredging and
Reclamation Works, published in 2001, which has fortunately resolved the problem
of the confusion between ‘risk’ and ‘liability’. Thus, for anyone who is intent on
using a form for smaller contracts, it would be better to base it on this latest form
published by FIDIC.
10  David M Walker, “The Oxford Companion to Law”, Clarendon Press, Oxford, 1980.
11 Nael G Bunni, “FIDIC’s New Suite of Contracts” – Clauses 17 to 19, ‘Risk, Responsibility, Liability, Indemnity,
Insurance and Force Majeure’, [2001] 18 ICLR, page 525, last paragraph.
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The New Major Books
As stated earlier, the new three major books (the new Red Book, the new Yellow
Book, and the Silver Book), are very similar in format. However, before considering
that similarity in format, it might be helpful to have a general overview of where
the new suite of contracts fits with respect to FIDIC’s Conditions of Contract that
existed prior to September 1999.  Figure 5.1 provides that overview, but as
mentioned before, one must remember that whilst the old forms of contract were
distinguished from each other by the type of project for which they were used,
the new forms are distinguished on the basis of the allocation of the design
function.  The old Red Book was for civil engineering projects whilst the New Red
Book is for Construction where the design is carried out by the Employer or on his
behalf (‘Construction’ includes building and engineering work). The old Yellow
Book was for electrical and mechanical works whilst the New Yellow Book is for
plant and design-build where the design is carried out by the contractor (for
electrical and mechanical plant, and for building and engineering works).
It is appropriate now to return to the similarity of the format of the new Forms of
Contract. They each contain twenty clauses, seventeen of which have common
titles and all of which have similar wording where the concepts match.12 Although
the number of clauses in each of these three forms of contract has been drastically
reduced from 72 in the old Red Book, and 51 in the old Yellow Book, the number
of words in each of the new forms has largely increased. Figure 5.2 shows the
exact number of words in Part I of the various Forms of Contract. However, the
wording is simpler and clearer than in the old books. The sentences are shorter
and express less number of ideas making them easier to understand. Figure 5.3
shows the number of Sub-clauses in each of the New Red, New Yellow and the
Silver Books.
Nevertheless, although the format is the same in all these Books, the Silver Book
New Red, where the DAB is either adhoc or
New Red, where the DAB is standing and the
Form of contract Equivalent in the New Forms
Red Book, 4th Edn., 1992
the engineer acts as the DAB
Red Book, 4th Edn., with suppl. 1996
Board is independent and impartial
Yellow Book, 3rd Edn., 1988 New Yellow, 1999
Orange Book, 1st Edn., 1995 New Yellow, 1999
Newly developed forms Silver Book and Green Book, 1999
Figure 5.1: Comparison of FIDIC’s old and new Forms of Contract
12 The three clauses that carry different titles are: Clause 3 (‘The Engineer’ in the New Red & Yellow Books and
‘The Employer’s Administration’ in the Silver Book); Clause 5 (‘Nominated Subcontractors’ in the New Red and
‘Design’ in the New Yellow and Silver Book books); and Clause 12 (‘Measurement and Evaluation’ in the New
Red and ‘Tests after Completion’ in the New Yellow and Silver Book books).
68
The New Suite of FIDIC Conditions: Significant Changes
can be distinguished by the absence of the function of the ‘Engineer’ and by its
peculiar allocation of the risks and by their shift from the employer to the contractor.
The other two books, however, continue the tradition of having an ‘Engineer’ and
remain as a whole within FIDIC’s tradition of drafting standard forms of contract
with a balanced allocation and sharing of risks between the employer and the
contractor.
These distinguishing characteristics of the Silver Book should not be taken as a
criticism of its concept and application. In particular, the Silver Book was conceived
in response to the need created by those who favoured the use of private finance
for infrastructure projects, and grew as a result of the demands associated with
0
5
10
15
20
25
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Clause Number
N
o.
 o
f s
ub
cl
au
se
s
in
 e
ac
h 
cl
au
se
Exceptions:
Clause 5, where there are 8 subclauses in the New Yellow & Silver Books
Clause 10, where there are 3 subclauses in the New Yellow & Silver Books
Figure5.3: Number of subclauses in the New Suite of Contracts
Red Book
4th Edn, 1992:
23,544 words
Yellow Book
3rd Edn, 1988:
16,550 words
Orange Book
22,932 words
Silver Book
27,172 words
New Yellow Book
31,431 words
New Red Book
30,431 words
Number of words in Part 1 of the various books
Figure 5.2: Comparison of the number of words in the text
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Nael G Bunni
BOT or BOOT projects and with the new ideas of mixing together design,
construction and operation. This entailed demanding a fixed, lump sum contract
price with least, or no, risk of an increase if and when unexpected events took
place. Of course, privately financed projects require being financially viable with
an assured return on the funds advanced. Therefore, although demanding a fixed,
lump sum contract price means that the employer would be paying a higher price
for the construction of the project, he would not normally object to having to do
so if he were assured of an acceptable return on his total investment.
With these distinguishing features of the Silver Book, it is appropriate to firstly
consider together the two books, the New Red and New Yellow, before looking at
the Silver Book.
The New Red and Yellow Books
As stated above, the new forms are not revisions of the 1987 editions of the Red
and Yellow Books. They form a total departure in format and in concept from their
predecessors. Having dealt with the changes in format, it is perhaps more interesting
to consider the significant changes in concept, which are many and, most of
them, welcome. They are 18 in number and are as follows.
The 1987 Red and Yellow Books are used for civil engineering and electrical/
mechanical works respectively, whereas the use of the New Red and New Yellow
Books differs in relation to the allocation of the design function. Furthermore, the
old Red Book and the old Yellow Book were intended to be used together whenever
necessary in any project that had in it both civil engineering and electrical/
mechanical works, for example hydroelectric power stations. This combination is
not appropriate any longer where the New Red and New Yellow Books are
concerned, since they are intended to cover the whole works, subject only to the
responsibility for the design.
A new provision has been added in both of the New Red and Yellow Books, which
recognise the risk of the “Employer’s Financial Arrangements”. Clause 2.4 provides
as follows:
Employer’s Financial Arrangements
“2.4 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 (as estimated
at that time) in accordance with Clause 14 [Contract Price and
Payment]. If the Employer intends to make any material change
to his financial arrangements, the Employer shall give notice to
the Contractor with detailed particulars.”13
13 Editor’s note: Should the Employer default, the Contractor may suspend or terminate the Contract (Section 16)
70
The New Suite of FIDIC Conditions: Significant Changes
Sub-clause 2.5 in the New Books differentiates between a claim made by the
Employer and a claim made by the Contractor. It provides for a different method
of dealing with Employer’s claims in that a notice should be given “as soon as
practicable after the Employer became aware of the event or circumstances giving
rise to the claim. A notice relating to any extension of the Defects Notification
Period shall be given before the expiry of such period”. The Engineer should then
proceed in accordance with Sub-clause 3.5 to agree or determine (i) the amount
(if any) which the Employer is entitled to be paid by the Contractor, and/or (ii) the
extension (if any) of the Defects Notification Period in accordance with Sub-clause
11.3. This is quite different from the strict requirements imposed on a contractor
submitting a claim (see below).
Both old and new books feature an Engineer in place, but differ in the allocation
of duties, in particular with respect to the design function. Clause 3 of the New
Red and New Yellow Books deals with the Engineer. Sub-clauses 3.1 “The Engineer’s
Duties and Authority”; 3.2. “Delegation by the Engineer”; and 3.4 “Replacement
of the Engineer” in the New Red Book are very similar to those in the old Red
Book, but Sub-clause 3.3 “Instructions of the Engineer” is quite different as it
deals with and relates to the design function.
There is a fundamental change from the old to the new books in the Role of the
Engineer. Sub-clause 2.6 in the old Red Book and Sub-clause 2.4 in the old Yellow
Book require the Engineer to be impartial, as can be seen from the following text:
“Wherever, under the Contract, the Engineer is required to exercise
his discretion by: ... , he shall exercise such discretion impartially
within the terms of the Contract and having regard to all the
circumstances...”,
whereas Sub-clauses 3.5 in the New Red Book provides as follows:
“3.5 Whenever these Conditions provide that the Engineer shall
proceed in accordance with this Sub-clause 3.5 to agree or
determine any matter, the Engineer shall consult with each
Party in an endeavour to reach agreement. If agreement is not
achieved, the Engineer shall make a fair determination in
accordance with the Contract, taking due regard of all relevant
circumstances...”
The higher standard of performance of Fitness for Purpose applies whenever the
Contractor is required to design under the new books. Thus, it is specified in the
first paragraph of Sub-clause 4.1 of the New Yellow Book that “When completed,
the Works shall be fit for the purposes for which the Works are intended as
defined in the Contract.” (see also Sub-clause 4.1(c) of the New Red Book and
Clause 11.3 in both books relating to Defects Notification Period).
Whilst all the books recognise the Matrix of pure Economic Risks, the wording of
the provisions of Sub-clause 4.2 relating to performance security differs greatly
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from its equivalent under the old books. So, for example:
• On-Demand Guarantee or Surety Bond is permitted under the new books;
• The Employer is not permitted to make a claim under the Performance Security
except for amounts to which he is entitled in specified events;
• An indemnity is specified where the Employer claims to the extent to which he
is not entitled; and
• The Employer is required to return the Performance Security within 21 days after
receiving a copy of the Performance Certificate, see Sub-clause 11.9.
Sub-clause 4.21 in the new books introduces the new requirement of the Contractor
having to produce “Progress Reports” such that “Unless otherwise stated in the
Particular Conditions, monthly progress reports shall be prepared by the Contractor
and submitted to the Engineer in six copies.” The Sub-clause continues by
prescribing that these Reports should be submitted monthly thereafter, each within
7 days after the last day of the period to which it relates and gives in detail what
they should contain.
In the New Yellow Book where the design function is given to the Contractor,
there are many new provisions, the most important of which is the “Employer’s
Requirements”. Sub-clause 5.1 provides as follows:
“General Design Obligations
5.1 The Contractor shall carry out, and be responsible for, the design
of the Works. Design shall be prepared by qualified designers
who are engineers or other professionals who comply with the
criteria (if any) stated in the Employer’s Requirements. Unless
otherwise stated in the Contract, the Contractor shall submit to
the Engineer for consent the name and particulars of each
proposed designer and design Subcontractor...”
The term Employer’s Requirements is defined in Sub-clause 1.1.1.5 and its significant
importance is perhaps reflected in the number of Sub-Clauses in which it is
referred to: 25 Sub-Clauses throughout the New Yellow Book. The drafting of
these requirements is probably the main source of success or failure of the project
and of the disputes that might arise in a project under this form of contract. The
Employer’s Requirements have a number of contrasting requirements:
The Employer’s Requirements should be:
• Complete, including all parameters relating to the required quality; the tests
which must be successfully carried out during and after construction; the expected
performance; how to operate and to maintain the project; the manuals to be
supplied; and details of the spare parts and their cost,
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The New Suite of FIDIC Conditions: Significant Changes
— YET by specifying all these parameters, the Contractor’s liability must not be
compromised, including the obligation of fitness for purpose;
• The Requirements must be drafted in a precise manner to define what the
Employer requires,
— YET, they should be flexible enough to generate one of the main advantages
of a design-build contract, namely the Contractor’s expert input into the
design and construction of the project;
• The Requirements should be demanding enough to enable the Employer to
successfully choose the most suitable Contractor from amongst the tenderers
invited to bid,
— YET, the tenderers should not be required, at the tender stage, to provide
more than the necessary information for the correct decision on the successful
tenderer;
• The Requirements must be sufficiently detailed to establish the purposes of the
project,
— YET, concise enough not to limit the Contractor’s ability to properly design
the works or to restrict his ingenuity in searching for the most appropriate
solution.
The provisions of the famous Clause 12 of the old Red Book (Sufficiency of
Tender and Not Foreseeable Physical Obstructions or Conditions) have been
maintained in the New Red and Yellow Books, the penultimate paragraph of Sub-
clause 4.12, but these provisions have been altered such that:
“... before additional Cost is finally agreed or determined under
subparagraph (ii), the Engineer may also review whether other
physical conditions in similar parts of the Works (if any) were more
favourable than could reasonably have been foreseen when the
Contractor submitted the Tender. If and to the extent that these
more favourable conditions were encountered, the Engineer may
proceed in accordance with Sub-clause 3.5 [Determinations] to agree
or determine the reductions in Cost which were due to these
conditions, which may be included (as deductions) in the Contract
Price and Payment Certificates. However, the net effect of all
adjustments under sub-paragraph (b) and all these reductions, for
all the physical conditions encountered in similar parts of the Works,
shall not result in a net reduction in the Contract Price.”
The provision regarding time limits for ‘Payment’ is altered in Sub-clause 14.7 of
the new books such that the Employer will be required to pay to the Contractor
“... (b) the amount certified in each Interim Payment Certificate within 56 days
after the Engineer receives the Statement and supporting documents; and (c) the
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amount certified in the Final Payment Certificate within 56 days after the Employer
receives this Payment Certificate.”
There are significant changes in risk allocation in the new books, as can be seen
for example in Clauses 15.5 and 19. Sub-clause 15.5 introduces the concept that
the Employer is entitled to terminate the Contract, at any time for his convenience,
by giving notice of such termination to the Contractor. Clause 19 substitutes the
concept of “frustration” in the old Red Book with that of “Force Majeure”, which
is defined in that clause as
“an exceptional event or circumstance:
(a) which is beyond a Party’s control,
(b) which such Party could not reasonably have provided against before
entering into the Contract,
(c) which, having arisen, such Party could not reasonably have avoided or
overcome, and
(d) which is not substantially attributable to the other Party.”
It may include, but is not limited to, exceptional events or circumstances of a
number of events listed therein, so long as conditions (a) to (d) above are satisfied.
A new concept of “Limitation of Liability” is now introduced in the three New
Books. Sub-clause 17.6 provides that the parties are not liable to each other:
“for loss of use of any Works, loss of profit, loss of any contract or
for any indirect or consequential loss or damage which may be
suffered by the other Party in connection with the Contract, other
than under Sub-clause 16.4 [Payment on Termination] and Sub-clause
17.1 [Indemnities] ...”
The total liability of the Contractor to the Employer, under or in connection with
the Contract other than in limited circumstances is required to be stated in the
Particular Conditions or (if a sum is not so stated) the Accepted Contract Amount.
However, this Sub-clause is not intended to limit liability in any case of fraud,
deliberate default or reckless misconduct by the defaulting Party.
Clause 18 ‘Insurance’ in the new books is significantly different from its equivalent
in the old Red Book. An analysis of this topic was made by the writer and
published recently in the International Construction Law Review.14
Sub-clause 20.1 provides for the procedure to be followed where a contractor
makes a claim. Strict time limits apply in that situation: A notice within 28 days
after the Contractor became aware, or should have become aware, of the event
14 See Reference 11 quoted above.
74
The New Suite of FIDIC Conditions: Significant Changes
giving rise to the claim. Subsequently, details must be submitted within 42 days
after the Contractor became aware, or should have become aware, of the event
giving rise to the claim. Due to the importance of the changes made in this
connection, the text of the relevant part of Sub-clause 20.1 is quoted below.
“Contractor’s Claims
20.1 If the Contractor considers himself to be entitled to any extension
of the Time for Completion and/or any additional payment,
under any Clause of these Conditions or otherwise in connection
with the Contract, the Contractor shall give notice to the
Engineer, describing the event or circumstance giving rise to
the claim. The notice shall be given as soon as practicable, and
not later than 28 days after the Contractor became aware, or
should have become aware, of the event or circumstance.
If the Contractor fails to give notice of a claim within such
period of 28 days, the Time for Completion shall not be
extended, the Contractor shall not be entitled to additional
payment, and the Employer shall be discharged from all liability
in connection with the claim. Otherwise, the following provisions
of this Sub-clause shall apply.
The Contractor shall also submit any other notices which are
required by the Contract, and supporting particulars for the
claim, all as relevant to such event or circumstance.
The Contractor shall keep such contemporary records as may
be necessary to substantiate any claim, either on the Site or at
another location acceptable to the Engineer...
Within 42 days after the Contractor became aware (or should
have become aware) of the event or circumstance giving rise to
the claim, or within such other period as may be proposed by
the Contractor and approved by the Engineer, the Contractor
shall send to the Engineer a fully detailed claim which includes
full supporting particulars of the basis of the claim and of the
extension of time and/or additional payment claimed...”
Sub-clause 20.1 also provides for strict time limit on the Engineer to respond to a
Contractor’s claim. It provides inter alia the following:
“Contractor’s Claims
20.1 If the Contractor considers himself to be entitled to any extension
of the Time for Completion...
The Contractor shall keep such contemporary records...Without
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admitting the Employer’s liability, the Engineer may, after
receiving any notice under this Sub-clause, monitor the record-
keeping and/or instruct the Contractor to keep further
contemporary records. The Contractor shall permit the Engineer
to inspect all these records, and shall (if instructed) submit
copies to the Engineer.
Within 42 days after receiving a claim or any further particulars
supporting a previous claim, or within such other period as
may be proposed by the Engineer and approved by the
Contractor, the Engineer shall respond with approval, or with
disapproval and detailed comments. He may also request any
necessary further particulars, but shall nevertheless give his
response on the principles of the claim within such time.
Each Payment Certificate shall include such amounts for any
claim as have been reasonably substantiated as due under the
relevant provision of the Contract. Unless and until the particulars
supplied are sufficient to substantiate the whole of the claim,
the Contractor shall only be entitled to payment for such part
of the claim as he has been able to substantiate.”
The above-mentioned provisions are extremely important in reducing a number of
usual conflicts that have persisted within, and beleaguered, the construction
industry.
Sub-clauses 20.2 to 20.4 in the new books introduce a new step, the Dispute
Adjudication Board (DAB), in the dispute resolution mechanism prior to the Amicable
Settlement procedure. This new step is, with minor variation, similar to that
under the 1996 Supplement to the old Red Book. The adjudication role of the
Engineer is thus taken away from him and handed instead to the DAB, which can
be either a single person or a number of persons chosen with specific qualifications,
which are described in the Form of Contract. The new books include details of the
Agreement that must be entered into between the Parties and the members of
the DAB.
However, the appointment of a DAB under Sub-clause 20.2 differs from that under
the 1996 Supplement in a few important aspects:
• The DAB in the New Red Book should be appointed by the date stated in the
Appendix to Tender, which suggests 28 days after the Commencement Date.
• The Guidance to the New Red Book includes the possibility of reverting to the
traditional role of the Engineer.
• The DAB in the New Yellow Book is only appointed by a date 28 days after a
Party gives notice of its intention to refer a dispute to a DAB.
76
The New Suite of FIDIC Conditions: Significant Changes
The New Silver Book
As discussed above, the new Silver Book is a newcomer to the field. To understand
the philosophy and reasons behind its conception, it is best to quote from the
authoritative paper written by the Chairman of FIDIC’s Contracts Committee and
Leader of the Task Group who prepared the FIDIC 1999 Conditions of Contract. 15
“Not only is it a fact of life that many employers have always
demanded ‘fixed, lump sum contract prices’, and that FIDIC did not
have a suitable standard form to cater for such demand, but in
recent years the trend has been towards private financing (not only
of private investment and speculative projects, but also of public
infrastructure projects). The prerequisites for obtaining private finance
for a project are vastly different from those of obtaining government
or other public money. Private financing requires that the project is
independently viable in financial terms, and that there will be, so far
as possible, an assured return on the finance provided. The lenders
on a BOT or similar project will do their calculations showing the
outlay over the construction period and the income over the
succeeding operation period. For the return to be reasonably assured,
the bases for their calculations will have to be as firm as possible. If
the construction work costs more than reckoned (inclusive of any
contingency allowance), then the calculations will not hold. If the
construction time is longer than planned, then the income will not
begin to come in on time, and the calculations will not hold. Therefore,
such lenders have to ensure that the risks of cost and time overruns
of the construction contract are limited as far as humanly possible.
Such lenders are aware that contractors will have to charge a premium
for carrying the additional risks necessary to provide the required
greater security of construction cost and time. The premium in certain
cases may reasonably be large. However, they would rather accept
such premium and include it in their calculations before embarking
on the project, than discover later on that the project is no longer
viable and that they are incurring an overall loss.”
Thus, the Silver Book has been and is intended to be used for special projects
and is not a ‘contract for all seasons’, as the old Red Book was used in practice,
but I hasten to add that it was not intended to be used in that way. The Silver
Book, if and when used, ought to be entered into with the utmost care, with all
eyes open focusing on the risks that have been shifted, from a balanced contract
between the parties to one where the risks are mostly allocated to the Contractor.
These risks are spread over a number of the Sub-Clauses of the Form, including
the following:
• Sub-clause 3.5: As stated above, there is no Engineer in place to deal with the
usual administrative matters and instead it is the Employer who carries out
15 Christopher Wade, “The Silver Book: The Reality”, ICLR, Vol. 18, Part 3 [July 2001], page 500.
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Nael G Bunni
such a role. Therefore, it is the Employer who makes the determination when
no agreement is reached between him and the Contractor. Sub-clause 3.5 states
in part the following: “If agreement is not achieved, the Employer shall make a
fair determination in accordance with the Contract, taking due regard of all
relevant circumstances.” The word ‘fair’ should be noted.
• Sub-clause 4.12: This Sub-clause provides a significant shift of a number of
risks to the Contractor, as clear from its text, which provides as follows:
“4.12 Unforeseeable Difficulties
Except as otherwise stated in the Contract:
(a) the Contractor shall be deemed to have obtained all necessary information
as to risks, contingencies and other circumstances which may influence
or affect the Works;
(b) by signing the Contract, the Contractor accepts total responsibility for
having foreseen all difficulties and costs of successfully completing the
Works; and
(c) the Contract Price shall not be adjusted to take account of any unforeseen
difficulties or costs.”
• Sub-clause 5.1: Errors, inaccuracies or omission of any kind in the original
Employer’s Requirements as included in the Contract are deemed to be a
Contractor’s risk, as can be seen from the text of this Sub-clause, which states,
in part, the following:16
“The Employer shall not be responsible for any error, inaccuracy or
omission of any kind in the Employer’s Requirements as originally
included in the Contract and shall not be deemed to have given any
representation of accuracy or completeness of any data or information,
except as stated below. Any data or information received by the
Contractor, from the Employer or otherwise, shall not relieve the
Contractor from his responsibility for the design and execution of
the Works.”
Therefore, the Contractor has to take on board not only strict liability for design
and the Fitness for Purpose standard of performance, but also be liable for “any
error, inaccuracy or omission of any kind” in the Employer’s original Requirements.
• Sub-clause 5.8: In a similar treatment, the responsibility for design errors, etc.,
is shifted to the Contractor, as the text of this Sub-clause provides the following:
“5.8 Design Error
If errors, omissions, ambiguities, inconsistencies, inadequacies
16 See the second paragraph of Sub-Clause 5.1.
78
The New Suite of FIDIC Conditions: Significant Changes
or other defects are found in the Contractor’s Documents, they
and the Works shall be corrected at the Contractor’s cost,
notwithstanding any consent or approval under this Clause.”
• The consequence of any of the following risks, derived from the terms of the
New Red and Yellow Books, is borne by the Contractor, since these risks have
been omitted from the list of Employer’s Risks in the Silver Book:
“(f) use or occupation by the Employer of any part of the Permanent
Works, except as may be specified in the Contract;
(g) design of any part of the Works by the Employer’s Personnel or
by others for whom the Employer is responsible, if any; and
(h) any operation of the forces of nature which is Unforeseeable or
against which an experienced contractor could not reasonably
have been expected to have taken adequate preventative
precautions.”17
Whilst it is expected that the Design risk should shifted to the Contractor, the
shift of the other two risks quoted above is significant and should bring to the
mind of the Parties that high risk means a corresponding high contingent price to
cover it.
• Sub-clause 20.1: With no Engineer in place to deal with the Contractor’s claims,
it is the Employer who receives the claims when submitted under Sub-clause
20.1 and it is he who responds with either approval or disapproval with detailed
comments.
Changes for the Employer and others for the Contractor
In the tradition of FIDIC, the new concepts have been incorporated into the new
books wherever they were appropriate, with some being in favour of the Employer
and others in favour of the Contractor, as appropriate from the point of view of
risk allocation. The following list shows the significant changes grouped on the
basis of the benefit and risk sharing envisaged.
New provisions in the 1999 Suite of contracts considered to be in favour of the
Employer:
• Sub-clause 3.4: The Employer is now entitled to replace the Engineer on a
Notice of 42 days, provided that the Contractor does not raise a reasonable
objection by Notice to the Employer.
• Sub-clause 4.1 (c): The higher standard of liability of Fitness for Purpose now
applies whenever the Contractor designs (see Clause 4.1 of the New Yellow,
17 A comparison between Sub-Clause 17.3 “Employer’s Risks”, in the Silver Book and that in the other two
Books, would reveal that these risks have been shifted to the Contractor.
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4.1(c) of the New Red and Clause 11.3 in both re Defects Notification Period.)
• Sub-clause 4.12: Changes in Clause 12 of the 1987 Red Book, (Clause 4.12 in the
new books, see effect of more favourable conditions in penultimate paragraph).18
• Sub-Clauses 4.21 and 14.3: The Contractor is now required to submit extremely
detailed monthly progress reports to the Engineer, including charts, photographs,
etc. to accompany applications for interim payments.
• Sub-clause 11.3: The Employer is now entitled to extend the Defects Notification
Period for the Works or a Section thereof, for up to 2 years in certain
circumstances.
• Sub-Clauses 15.5 and 19.6: The Employer is now entitled to terminate the Contract,
after giving Notice, at any time for his convenience, provided such termination
is not for the purpose that the remaining work be executed by the Employer
himself or by another contractor.
• Sub-Clauses 17.3: The shift in risk from the Employer to the Contractor, particularly
in the Silver Book.
• Sub-Clauses 20.1: The Contractor is now required to give ‘Notice to the Engineer
for any claim to any extension of the Time for Completion and/or any additional
payment describing the event or circumstance giving rise to the claim’. This
notice ‘should be given as soon as practicable, and not later than 28 days after
the Contractor became aware, or should have become aware, of the event or
circumstance.’
• Sub-clause 20.1 contains a severe sanction should the Contractor fail to give
notice of a claim within the period of 28 days. Such failure would mean that the
Time for Completion shall not be extended, the Contractor shall not be entitled
to additional payment, and the Employer shall be discharged from all liability in
connection with the claim.
New provisions in the 1999 Suite of contracts considered to be in favour of the
Contractor:
• Sub-clause 2.4: As stated above, the Employer is required to submit on 28 days
of the Contractor’s request “reasonable evidence that financial arrangements
have been and are being maintained” to pay the contract price. This is a powerful
mechanism that ensures the ability to pay before incurring the costs and
eliminates any delay or false reasoning for non-payment of due monies to the
Contractor.
• Sub-clause 2.4: This clause also requires the Employer to give a Notice with
detailed particulars, if any material change is intended in the financial
18 Editor’s note: In essence, the paragraph provides for a reduction of the contract price if conditions are better
than those anticipated at the time of tendering.
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The New Suite of FIDIC Conditions: Significant Changes
arrangements.
• Sub-clause 2.5: This Sub-clause requires the Employer (or Engineer) to give
notice and particulars to the Contractor if he considers himself entitled to
payment or extension to the Defects Notification Period, specifying the basis
and including substantiation of claim. The notice must be as soon as practicable
after the Employer “became” aware of this event giving rise to the claim.
• Furthermore, the Employer has the right of set off against, or of deduction from,
a certified amount in a Payment Certificate or otherwise to claim from the
Contractor under this Sub-clause.
• Sub-clause 13.7: The Contractor’s right to adjustment of the Contract Price
resulting from changes in the law is extended to include changes to the judicial
or official Governmental interpretation of such laws made after the Base Date.
• Sub-clause 14.8: This Sub-clause entitles the Contractor to receive financing
charges, compounded monthly on unpaid amounts during periods of delay,
calculated as 3% above the discount rate of the central bank. This entitlement
is without formal notice or certification and without prejudice to any other right
or remedy.
• Sub-clause 16.1: The Contractor is entitled under the new books, after giving 21
days’ notice, to suspend or reduce the rate of work where the Engineer fails to
certify an interim payment certificate or the Employer fails to provide information
regarding his financial arrangements. Most significant perhaps is that this clause
is incorporated not only in the New Red and Yellow Books, but also in the Silver
Book.
• Sub-clause 17.6: Sub-clause 17.6 in the new books “Limitation of Liability”
permits the Contractor to limit his liability.
• Clause 19: This Clause in the new books “Force Majeure”, replaces the Special
Risks concept.
• Sub-clause 20.1: As stated above, one of the major new conceptual changes is
the new time limit of 42 days imposed on the Engineer to respond to a claim
from the Contractor, or to respond to further particulars supporting a previous
claim, with approval or disapproval giving detailed comments.
• Sub-clause 20.3: The long-standing and much criticised quasi-arbitral role of
the Engineer in the settlement of disputes is now removed and given to a DAB,
either standing or ad hoc.
Conclusions
There are sufficiently valuable innovations and new concepts in the New Red and
Yellow Books, some of which have been overdue for some time, to entice the
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Nael G Bunni
construction industry to adopt them for use as standard forms. No other form has
managed to treat the major issues dealt with by these forms so successfully.
However, as usual in such ventures, there are certainly some remaining problems
in a number of provisions that are yet to be tackled and resolved by amendments.
In particular, amongst the amendments that are required are those to Clauses 17
and 18, the ‘Risk’ and ‘Insurance’ clauses.19
Where the Silver Book is concerned, it is perhaps appropriate to quote once
again from Mr. Christopher Wade (see footnote 14), who referred to the Silver
Book as a form of contract that sets out clearly and exactly which party is to bear
which risk. Thus, contractors and employers
“...can enter into such contracts with their eyes wide open. They can
be clearly aware of what risks are their responsibility, instead of
fumbling about in the darkness and hoping for the best, as
circumstances have often required them to do in the past.”20
As to the Green Book, there is unfortunately some confusion in the meaning and
treatment of the important terms of ‘liability’, ‘risk’, ‘responsibility’ and ‘insurance’,
which require special attention. The confusion seems to have been resolved in
the Test Edition of the new Dredging and Reclamation form of contract, another
short form of contract, which has been issued recently by FIDIC for comments.21
For those seeking such a contract, this latter form seems to be more appropriate
to adopt.
I would predict and therefore would not be surprised if some jurisdictions were to
adopt these forms for their own domestic forms of contract, after appropriate
amendments.
19 Such of these problems have been isolated and resolved by amendments incorporated in the newly proposed
conditions of contract in Ireland, which are based on the New Red Book.
20 As in reference no. 14 quoted above, but page 501.
21 Form of Contract for Dredging and Reclamation Works, published by FIDIC as a Test Edition in 2001.
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The New Suite of FIDIC Conditions: Significant Changes
83
Martin Barnes
Abstract
Some fifteen years ago there was a strong belief amongst a small number of people
working in engineering and construction project management in the UK that the then
current standard forms of contract were seriously deficient in two main respects: firstly,
they reinforced the adversarial behaviour of the main players and, secondly, they obstructed
the application of good project management practice at the interfaces between the main
players.
A team was set up, headed by Martin Barnes, to design a radically new contract that would
eschew these shortcomings and provide other advantages. The new contract was to have
three principal characteristics: a simple structure, simple, non-legalistic language, and
versatility. Versatility would be achieved if the same contract could be used for any type of
engineering or construction work, for any chosen contract strategy, at any interface including
subcontracts and in any part of the world. A secondary objective was that the new contract
should be designed with electronic use in mind.
The work of specifying, designing and drafting the new contract was sponsored by the
Institution of Civil Engineers. It was carried out by a small team of people drawn from
different backgrounds and with expert legal contribution. The result was the New Engineering
Contract (NEC). After full consultation and trials, it was first published for general use in
1993. Since then it has been taken up widely by the industry and its clients, and achieved
considerable success. It is known to have been used in at least twenty countries and on a
wide variety of projects. The growth in its use has been exponential, as more organisations
gain experience of it. Typically, they try it out or come across it on one project and then
decide to use it generally.
The family of NEC contracts has grown so that it now includes contracts for the professional
contributors to projects (designers, project managers, etc.), a version for very simple,
small projects and a supplement that provides for full partnering/alliancing around a project
team. Most of the major clients for infrastructure projects in the UK now use the NEC as
their standard form. This covers the very largest projects, such as the building of the new
railway from the Channel Tunnel into London, through to the myriad of small projects
undertaken, for example, by local government authorities. All central government highway
projects are now managed using the NEC. A detailed commentary on a practical application
of the NEC is provided by Tim Wood, through the Tamar Bridge Case Study in Chapter 8.
The following pages describe the main features of the NEC, concentrating on those that are
different from traditional forms such as FIDIC.
The NEC is essentially a system for managing the interfaces and, as such, is much more
than a traditional contract. It allocates the risks very clearly and, in some respects, very
6 A New Approach — the NewEngineering Contract
Martin Barnes
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A New Approach - the New Engineering Contract
differently. All of the unhelpful traditional processes have been modified or eliminated. The
management procedures built into the NEC are also published as flow charts.
The approach to disputes built into the NEC is: firstly, that few should grow to the point
where they can be considered a dispute; and, secondly, that most of that few should be
settled by the participants in the project and, thirdly, that the very, very few which cannot
be so settled should be settled quickly by a non-legal third party expert.
This last resort process is called adjudication, but it should not be confused with other
processes used outside the NEC which are now also called adjudication. A note at the end
of this chapter delves into the important function of the Adjudicator, or ‘neutral party’. The
note has been prepared drawing from Martin Barnes’ extensive project experience, and
compares adjudication with arbitration, in clear and frank words — his own, heartfelt
views.
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Martin Barnes
The New Engineering Contract
The New Engineering Contract (NEC) was developed by a team headed by the
author under the auspices of the Institution of Civil Engineers in the UK. It was
published for general use in 1993. Since then it has become very widely used in
the UK and also in more than twenty countries around the world. It breaks away
entirely from traditional construction and engineering contracts. The philosophy
of the NEC is summarised in its three basic objectives. They are — clarity, simplicity
and stimulus to good management. The last is by far the most important change
from previous practice.
Clarity and simplicity mean that the NEC uses a simple structure, simple language,
simple procedures and clear risk allocation.
Flexibility means that the NEC can be used for any type of construction work, any
contract strategy, and work on any scale in any place. The NEC can also be used
for all the contracts needed on one project. These may include contracts for main
contractors, subcontractors and professionals.
Stimulus to good management means clear roles, joint decision-making, proper
motivation, a forward-thinking culture and controlled outcomes in terms of cost,
time and function of the completed project.
Joint decision making is achieved by early warning of problems and by using a new
method for compensating contractors for events, which are at the Employer’s risk.
Proper motivation means collaborative working at all levels and sources of dispute
dealt with on site.  Achieving the Employer’s objectives dominates the management
style.
In the use of the New Engineering Contract, the traditional adversarial approach
is eliminated. This is because a contractor’s profit depends only on his own
efficiency in doing the work. He has no need to make retrospective claims for
additional money and, indeed, the contract gives him no right to such claims.
Forward thinking is stimulated by joint uses of the programme, by early warning
of all problems and by concentration upon achieving the final objectives for the
project.
The NEC is the only standard contract which is based on modern best practice in
Project Management. It stimulates forward-looking control of cost, time and
performance. Uniquely, and for the first time, it provides for effective management
and control of risk.
Much of the NEC is ‘general purpose’ and can be used in all situations. For
example, the contract assumes that there are several contractors working alongside
on the same site. Consequently, it works well for CM1 package contractors and for
multiple subcontractors. Every contract allows for the Contractor doing some
1 Construction Management
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A New Approach - the New Engineering Contract
design. Consequently, there is no need for a special ‘design and build’ version of
the contract.
The flexibility of the NEC is achieved through choosing the right contract from the
NEC family of contracts and choosing the right options for clauses within the
contract.
The NEC family is made up of seven standard contracts. They all use the same
basic set of procedures, the same management culture and the same terminology.
The four main members of the family are:
• the engineering and construction contract;
• the subcontract;
• the professional services contract; and
• the Adjudicator’s contract.
Three other members of the family are:
• the short contract;
• the short subcontract; and
• the NEC partnering option.
The main construction contract is called the Engineering and Construction Contract
(ECC). The roles defined in this contract are the Employer, the Project Manager,
the Contractor, the Subcontractors and the Supervisor. There is also the Adjudicator
whose role it is to settle disputes that might arise between the Project Manager
acting for the Employer and the Contractor. There can be any number of
professionals helping any of these main parties. Designers, for example, can be
working for the Employer or for the Contractor or both.
The options in the main contract set the contract strategy by determining the
pricing arrangement for the particular contract. The options are:
• Lump sum tendered prices;
• Tendered prices with Bill of Quantities;
• Target cost with Profit Share;
• Management Contract; and
• Cost-reimbursable contract.
These main options each comprise of a small number of clauses added to the
core clauses of the NEC contract. There are also several single-clause, secondary
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Martin Barnes
options for matters like parent company guarantee, retention, formulae for inflation
adjustment, delayed damages and multiple currencies.
The compensation event procedure is an important element of the NEC. It is used
to deal with everything which is at the Employer’s risk — including variations. The
compensation is based on the Contractor’s forecast of the effect of the event on
his cost and on his programme. Notice that the compensation is not based on the
Contractor’s original prices. Consequently, he is indifferent to the Project Managers
choice of solutions to the problem. A fee percentage is added to the forecast cost.
The Project Manager accepts or rejects the Contractor’s quotation for each event.
There is no later review of the amount of compensation which has been decided.
The Contractor takes the risk that those matters that are within his control may
vary from what he expected.
In summary, the NEC contracts were designed to be very different from traditional
contracts – and they are. They were designed from a clean sheet of paper, as a
means of managing the interfaces in a complex project. The NEC contract is
supported by full guidance notes for the new user, which are available on the CD,
along with flow charts of all the management procedures and full electronic
versions of the contract.
It has been stated that the New Engineering Contract is being used for over ninety
percent of infrastructure projects in the UK. It is being used for very large civil
engineering projects such as the building of the Channel Tunnel Rail Link from
London to the English Channel ports. It has been used for major power generation
projects. It is used for all major road schemes funded by the UK central government.
London Underground now uses it for their major projects and it is being used for
a large number of building projects around the world. It has also been used for a
small number of projects in the Pacific Rim region including New Zealand, Australia,
Hong Kong and China.
It is very clear that site relationships are very much better when NEC is used than
when traditional contracts are used. Real partnerships develop and the certainty
of outcome in terms of cost, time and performance of the completed projects
and profit for the contractors and subcontractors is significantly improved. Contracts
are settled very much more quickly and with hardly any argument. Most
Adjudicators have nothing to do. Perhaps the most convincing argument for the
value of the NEC and the improvement that it is over traditional contracts such
as ICE and FIDIC, is that, as far as is known, every organisation which has tried
the NEC2 once has continued to use it. The proof of the pudding has come from
eating it!
2 For further information about the NEC please contact the publishers Thomas Telford Services Ltd, 1 Heron
Quay, London, E14 4JD, UK, telephone number +44 207 665 2484, www.newengineeringcontract.com. Thomas
Telford publishes the NEC in hard copy and in electronic version: the NECD (a CD interactive version that
allows contract drafters to prepare documents including the particulars of the parties and all other matters
pertaining to the Contract).
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A New Approach - the New Engineering Contract
Avoiding Disputes using the Neutral Party — Adjudication
Having been involved in many arbitrations as an expert witness, I hold the view,
which I have had for some time and which many others share, that arbitration is
a seriously defective method of settling disputes on engineering and construction
projects. It is ludicrously slow and ludicrously expensive and its outcome is very
often random. It is not unusual for disputes to take years to settle and for the
cost of the process to be several million pounds or dollars. The process of arbitration
is conducted by two teams, each of which is determined to vanquish the other.
Seldom were the people in either team involved in the project on which the
dispute arose. Instead, they are professionals in conducting the process of
arbitration, whose pay is proportional to how complicated the process becomes
and how long it takes to complete.
My experience, which may not be typical, is that the outcome of an arbitration is,
more often than not, a decision which is unconnected with the realities of what
really happened. By the time the arbitrator makes his decision (or their decision
if there are three of them, which is usual in international arbitrations) the issues
at stake have been banged and buffeted about for so long that their resemblance
to what really happened on the project has disappeared.
I do not argue that arbitration is worse than litigation; I have no experience of
litigation. I do argue that arbitration is a ridiculous method of solving disputes on
projects. It must be within the power of intelligent people to invent a process
which takes a fraction of the time, costs a fraction of the money and more often
produces the right answer.
My own view of what would be better is expressed in the adjudication procedure
in the New Engineering Contract. The NEC design team, which I was fortunate to
lead, designed this procedure around an independent dispute settling person
whom we called the adjudicator. He is a technical, non-legal person (or a group of
people or a firm) appointed jointly by the parties when they enter the contract.
He, she or they do nothing until they are first called upon to make a decision
about a dispute — hopefully never. Unlike dispute review boards and similar
bodies, they are not expected to keep in touch with the conduct of the work and
are paid no retainer. Their fees for dealing with the dispute are shared equally
between the parties whatever the outcome of the matter. These last two features
of the system are designed to discourage parties from referring matters to the
adjudicator.
The adjudicator is not constrained to conduct the investigation of the matter in
dispute in any particular way but is constrained to decide quickly. His, her or their
decision is based on what the parties submit at the beginning of the process.
The parties do not have experts or legal representation but the adjudicator can
get help when he/she or they decide that they need it.
The adjudication used in the NEC should not be confused with other types of
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Martin Barnes
dispute resolution. It is an integral part of the NEC process, although it is not
intended that adjudicators should often have anything to do. The main thrust of
the NEC is that disputes are settled by the parties themselves without recourse to
an independent third party. The detailed processes for management which are
built into the NEC include accumulation of records that, in the event of a dispute,
form the basis of the information which the adjudicator uses. No other standard
form of contract has this facility. It makes for a very rapid reference of disputes to
adjudicators when necessary and it is very cheap and efficient because production
of additional documents is minimised.
The contract includes very tight time periods for submission of disputes to the
adjudicator and for the adjudicator to reach a decision. The parties can, of course,
extend these periods by mutual agreement and have done so in one or two
cases. If either party is unhappy with the result of the adjudication, he or she can
take the matter to arbitration or to litigation. Obviously, if this were to happen
very often, the adjudication process would not be working very well.
The NEC dispute resolution procedures are working very well in the sense that
very few disputes are going to the adjudicator and those that do are being settled
quickly and efficiently. The NEC is essentially a contract to manage construction
and engineering work. Consequently, if there is a dispute, it is likely to be about
the management of the work. There should be very few disputes indeed about
legal interpretation of the contract. A consequence of this characteristic is that the
adjudicators appointed under the NEC should be essentially project managers.
They will discharge the function best. It would be quite inappropriate to have a
lawyer as an adjudicator under a NEC contract.
Where a project is being run collaboratively, as when the NEC is being used, the
idea of mediation loses some of its point. Mediation, dispute review boards and
other forms of alternative dispute resolution generally are approaching dispute
resolution from an uncomfortable stand point when a partnering type of contract
is used. Adjudication, and particularly adjudication as set out in the NEC, seems
to be rather better.
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91
Suzanne Wilkinson
7 The New Zealand StandardConditions of Contract
Suzanne Wilkinson
Abstract
This chapter presents a comparison of New Zealand Standard Conditions of Contract, vis-
a-vis the conditions of contract issued by the International Federation of Consulting Engineers
(FIDIC’s new Red Book) and the New Engineering Contract (Engineering and Construction
option) of the Institution of Civil Engineers, London, with particular reference to risk
apportionment and management, and the processes for dispute resolution. The last two
forms are referred to in this chapter respectively as the FIDIC and NEC forms of contract.
The construction industry in New Zealand currently uses a range of standard contracts.
These contracts differ in length, content and use. They range from individually-drafted
contracts for minor works, to contracts for international projects. This chapter refers
particularly to the most common types of standard forms of contract used in New Zealand,
NZS3910:1998 and the new special version, NZS3915:2000.
The goal pursued by the writer is to point out differences and similarities, as a contribution
to the current discussions on the updating of NZS3910, without presuming to design
revised or new clauses for the New Zealand standard form.
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The NZ Standard Condirtions of Contract
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Suzanne Wilkinson
Introduction: The General Conditions of Contract and their Intentions
Kennedy–Grant1 discusses the nature of general forms of construction contracts.
He points out that construction contracts are “...neither easy to define nor easy to
understand because they are of more than one type”.
He supports this assertion by explaining, first, that contracts are complicated
because they can be either building or engineering contracts (dams, process
plants, wastewater treatment plants, etc.). Second, contracts are used for differing
types and quantities of work, involving from a few people in a simple contractual
arrangement (employer, architect, builder) to large numbers of people and
organizations in complex contractual arrangements. Third, he refers to the different
procurement options available, from traditional construction procurement based
on bidding documents including drawings and specifications, to design and build
contracts, and other more elaborate arrangements.
Kennedy-Grant points out that the different procurement options necessitate
different contract approaches, appropriate for construction only, design and
construction, design, construction and operation, and so forth. The following
discussion takes into account the inherent complexity thus defined.
NZS3910:1998 and other Standard Conditions of Contract in use in New
Zealand
NZS3910:19982 (hereafter referred to as “NZS3910”) is an established and tested
standard form of contract, used for most building and civil engineering construction
in New Zealand, generally applied with the traditional form of procurement. The
contract is designed for all construction and building contracts including complex
construction projects where an independent specialist consultant is used to
administer the project.
Currently NZS3910 is being updated (DZ3910:20023) and revised. The draft changes
suggest that the majority of the sections will be subjected to minor alteration
aimed at reducing ambiguities and inconsistencies, and also reflecting changes in
the law, or meeting the needs of current industry practices.
NZS3910 makes provision for the Contract to be administered by an “Engineer”
acting on behalf of the Principal where the Engineer “...means the professional
engineer, architect, surveyor or other one natural person identified it the Special
Conditions or such other one natural person as may be subsequently appointed
by the Principal...”. Under Section 6 of this contract the Engineer’s powers and
responsibilities are set out and his/her dual role is defined, first, as expert adviser
to, and representative of, the Principal, and second, as independent decision-
1 T Kennedy-Grant, Construction Law in New Zealand, Butterwoths, Wellington, 1999.
2 NZS3910:1998.  Conditions of Contract for Building and Civil Engineering Construction,  Standards New
Zealand, 1998.
3 DZ3910:2002 is a draft revision of the above, being circulated for comment at the time of writing.
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The NZ Standard Condirtions of Contract
maker and certifier.
A recent variation of the standard form is NZS3915:2000.4 This is a standard
document for building and civil engineering construction where no person is
appointed to act as Engineer in the Contract. The contract has been developed
for use where the client administers the contract without the use of an engineer.
The contract, in the foreword, specifically makes reference to “...a need expressed
by the Registered Master Builders’ Federation of New Zealand for a New Zealand
standard contract form for the situation where the client (Principal) administers
the contract directly.” Hence the term “Engineer” has been removed throughout
the document. Instead, Section 6 refers to a Principal’s Representative who can
be the Principal or its representative. There is no reference to the independence
of this person; instead, the duties, such as inspection, recording, measuring, and
testing are defined, and the Representative’s role is set out, in relation to these
functions.
Although still applicable in the traditional procurement approach, this contract
form widens the options available. However, the document does point out that:
“NZS3910 is considered to be the appropriate form of conditions of
contract for the general case – with NZ3915 used on comparatively
straightforward projects where an experienced engineer, architect,
surveyor or other suitable person (either a direct employee or another
person) is not readily available to the Principal to act as Engineer to
the contract.”
NZS3910 and NZS3915 are just two of the forms of construction contract available
for use in construction projects in New Zealand. Other commonly used standard
forms for construction are issued by different industry institutions. The most
widely used ones are the Master Builders’ Federation (MBF) and The New Zealand
Institute of Architects (NZIA) standard forms. The MBF form is intended for small
building projects of any nature. However, the purpose of drafting NZS3915 was to
meet the needs of the Master Builders’ Federation and so in future there may be
a shift towards NZS3915, away from the MBF standard conditions.
The NZIA have designed a series of contracts for use by their members. The
Standard Conditions of Contract, 2000 (SC-C1) is widely used by architects when
they are engaged by a Principal for full services, including contract administration.
The National Building Contract - General, 1998 (NBC-G1) is for use on contracts
where the Architect does not undertake the contract administration of the
construction project. In this case, the Architect may be involved in the design and
prepare contract documentation. The National Building Contract - Small Works,
1999 (NBC-SW2) is for a similar purpose as NBC-G1, for smaller building projects,
costing less that $100,000.
4 NZS3915:2000. Conditions of Contract for Building and Civil Engineering Construction (where no person is
appointed to act as Engineer to the contract), Standards New Zealand, 2000. Referred to as NZS3915 in the text.
Where no specific reference is made in the text to NZS3915, the discussion on NZS3910 also refers to the former.
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Suzanne Wilkinson
Many other organisations and professional bodies, companies and local authorities
use either their own drafted forms of contract, or variations of NZS3910. The latter
can differ widely from the original, after amendments, deletions, and additions.
Detailed research must be made, to understand the impact of those changes on
risk apportionment and project administration, before accepting the amended
conditions.
General Comments
The following are general comments with regard to the readability, simplicity,
interpretation and application of NZS3910, FIDIC5 and NEC6 contract forms.
In terms of readability and simplicity there are some pointed differences between
the three main forms of contract under discussion. The largest difference is between
the NEC and the other two forms. Whilst the NEC is written in clear, simple
English, the uninitiated may find difficulty in navigating its clauses, because of
the many options involved. In extreme cases, problems may arise if the wrong
options are chosen, or one or more of the secondary optional clauses are omitted,
resulting in opportunities for potential disputes. However, this should be overcome
with careful attention to detail, which is in any case required when using any
contract form for the first time.
Further, the NEC includes an important feature to assist the drafter and contract
administrator: a series of flow chart diagrams for the main events that are likely
to occur. The NEC extensively details these events, and provides separate flow
charts which aim to “...help people using the NEC to see how the clauses of the
NEC various options come together to produce clear and precise sequences of
action for the people involved.” The FIDIC New Red Book also has some charts at
the beginning of the document which outline the sequence and timing of actions
to be followed for principal events, payments, and the handling of disputes.
NZS3910 includes one flow chart within the guidelines. It is a useful general aid
for the valuation of variations, but does not incorporate any other sequence flow
charts.
The FIDIC construction contract and NZS3910 are fairly similar in format and are
easier to follow for practitioners used to the traditional forms. In both the NEC
and the FIDIC forms the text is broken into more manageable sub-clauses. In its
present form, NZS3910 tends to have wordier sub-clauses and sub-sections which
makes it slightly less readable. The three forms are organised in varying numbers
of sections, not necessarily in the same sequence. This complicates the comparison
of clauses between the documents with respect to the treatment of particular
circumstances that may arise in contract administration.
One principal feature of the NEC is its use of refreshingly plain and easily understood
5 International Federation of Consulting Engineers (FIDIC), Conditions of Contract for Construction —for building
and engineering works designed by the Employer, FIDIC, Lausanne, Sewitzerland, 1999.
6 The Institution of Civil Engineers, London. The New Engineering Contract: The Engineering and Construction
Contract, 2nd Edition, Thomas Telford, London 1995.
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The NZ Standard Condirtions of Contract
language. However, changing of internationally well-understood terms can cause
confusion among traditionally-minded users. For instance, the NEC avoids the use
of the term ‘Variation’, and refers instead to changes requiring a ‘Compensation
Event’ (as detailed in clause 60). Since ‘variations’ are universally understood and
the term has been tested in legal practice, this seems an unnecessary departure
from what in effect ends up as the same situation, i.e. a change in conditions or
circumstances leading to extra payment and, possibly, an extension of time.
To assist with the interpretation and application of their various provisions, all
three contract forms follow a similar approach, providing a set of guidelines. Both
NEC and FIDIC have comprehensive guidelines, a feature which is not available in
NZS3910 to the same extent.
A very good feature of the NEC, not found in the FIDIC document or in NZS3910,
is the drafters’ express aim to encourage a non-confrontational approach to contract
management. Included in ‘General’, clause 10 is a statement that the parties
“...shall act as stated in this contract and in the spirit of mutual trust and co-
operation.” The first section of the NEC also contains four clauses that highlight
the importance of communication and set out communication procedures (clauses
13,14,16,17). These make it clear where the responsibility for communication lies
and how communication is to be handled, thus aiding contract administration
and application.
Clause 16, in particular, is a good example of the drive within the NEC to resolve
problems as they arise. It makes provision for an early warning system, containing
a notification followed by a meeting to resolve “...any matter which could increase
the total of the prices, delay completion or impair the performance of the works
in use.”
Risk Apportionment and the Treatment of Risk in NZS3910, NEC and FIDIC
Bunni7 identifies four main areas where risk in construction occurs, and links these
areas to clauses found in the previous FIDIC Red Book, i.e. the Fourth Edition of
1987. The classification Bunni advances is still valid; the risks he typifies are:
• the risk of injury or damage (personal and material);
• the risk of non-performance;
• the risk of delay in performance of the contract; and
• the risk of cost over-run in the performance of the contract.
In the light of the Bunni definitions, this section examines the treatment of such
risks in the NEC, the FIDIC new Red Book, and NZS3910, and some of the major
differences between the contracts.
7 Nael G Bunni, The FIDIC Form of Contract — The Fourth edition of the Red Book, Blackwell Science, Oxford,
UK, 1991.
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The Risk of injury or damage (personal and material)
The Risk and Responsibility Section 17 of the FIDIC construction contract covers
the ‘Employer’s Risks’ (clause 17.3) and ‘Consequences of Employer’s Risk’ (clause
17.4). These outline the general contract risks assumed by the Employer during
construction. However, other clauses refer to other more specific areas of risk. For
instance, regarding the Employer’s Equipment, clause 4.20 states that:
“...the Employer shall be responsible for the Employer’s Equipment,
except ... whilst any of the Contractor’s personnel is operating it,
driving it, directing it or in possession or control of it.”
Although this is a statement of responsibility, it implies the inherent risk for the
Employer, if its equipment on site causes injury or damage.
The Contractor’s risks of injury and property damages arise from various specific
provisions of the FIDIC form, and from the Contractor’s general responsibility for
the Works. The contractor takes full responsibility for Care of the Works, as specified
in clause 17.2. More specific provisions dealing with injury or damage can be
found in Section 4 - The Contractor. Its clauses that deal with Safety Procedures
(4.8), Contractor’s Equipment (4.17), Protection of the Environment (4.18) and
Electricity, Water and Gas (4.19) are relevant, as they all have an element of risk
associated with them. Health and safety of personnel is covered in Section 6
(Staff and Labour): clause 6.7 details the precautions the contractor must take to
protect people from injury. By implication, failure to meet those requirements is
an inherent risk of the Contractor.
Risk of injury is covered in NEC clause 18.1. The guidance notes on this clause
refer to “...laws which place considerable responsibilities upon employers,
employees and others in relation to health and safety” and suggests that the
specific health and safety requirements to be complied with by the parties should
be specified. Wider reference to the risk of injury or damage is also made in other
sections of the NEC. Section 8 has clauses specific to Risks and Insurance. Clause
80.1 deals with the Employer’s Risks and clause 81.1 deals with the Contractor’s
Risks, which are defined with a blanket statement: “From the starting date until
the Defects Certificate has been issued the risks which are not carried by the
Employer are carried by the Contractor ”. The NEC Guidance Notes relating to sub-
clause 80.1 identify six main categories of Employer’s risks, some of them specifically
linked to injury or damage: risks of the Employer’s use of Site of Works; the
Employer’s general or legal responsibilities and faults in design; loss of or damage
to works, plant or materials outside the parties’ control; risks arising once the
Employer has taken responsibility for the Works; loss or damage to equipment
remaining on site after termination; and any additional risks that are stated in the
Contract Data. The NEC guidance notes recommend ways of dealing with these
risks primarily, although not exclusively, through the use of different insurances.
Reference to law, but not specifically to health and safety, is also found in NZS3910.
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Sub-clause 5.11.1 requires compliance with all statutes, which therefore must
include the Health and Safety in Employment Act (1991). However, clause 5.7
specifically deals with protection of persons and property and provides similar
clauses to those found in NEC and the FIDIC documents with regard to health and
safety. Clauses associated with risks of damage are also found in the Section 5 -
General Obligations. Clause 5.6 deals with the care of works, with sub-section
5.6.5 detailing the excepted risks which are similar in content and wording to the
Employers risks in the FIDIC construction contract (sub-clause 17.2).
Whether by specification or inclusion, all three forms deal with the risks of injury
or physical damage. The brunt of the responsibility for catering for those risks
falls with the Contractor in most cases. Regarding the applicable laws, contract
forms may be silent or explicit; however, it is a universal tenet that ignorance of
a law is no excuse for non-compliance. When operating in an unfamiliar country
or business environment, contractors must obtain legal advice regarding the laws
applicable to risks of injury, causing health problems related to site conditions, or
damage to property or the environment, apart from those applicable to the design
or construction activity per se (e.g. NEC 21.2).
Risk of non-performance
The risk of non-performance is usually dealt with by the clauses on default. The
FIDIC New Red Book deals with default by the Contractor in Section 15 - ‘Termination
by the Employer’; and default by the Employer under Section 16 - ‘Suspension
and Termination by the Contractor’. The Employer is entitled to terminate the
works through default and other reasons (such as bankruptcy). The default reasons
listed are: not providing a performance security, not complying with a notice to
correct, abandoning the works, failing to proceed with the works or put right
defects, and subcontracting the whole of the works. The Contractor, for his part,
is entitled to suspend work or terminate the Contract, if the Employer defaults
through actions such as failure to certify, issue payments, or perform obligations
specified in the Contract.
Among the contract obligations that may give rise to the risk of non-performance
caused by Employers, these can refer, for instance, to non-availability of the site
of works, or impediments to access (FIDIC clause 2.1); failure to assist in procuring
permits and licenses (FIDIC clause 2.2). Employers should be particularly wary of
making available to the Contractor any equipment or materials (FIDIC clause
4.20): delays or defects on these form part of the risk of non-performance. This
matter is dealt with in NEC in clause 80.1 and in NZS3910 in clause 5.16. It should
be noted, however, that NZS3910 refers only to “Late Supply by Principal”, without
reference to quality, or the consequences of providing defective equipment or
materials that do not conform to specifications.
Clauses 94 and 95 of the NEC deal with termination of the project through default
of the Employer and Contractor, respectively. Sub-clauses 95.2 and 95.3 list mostly
similar reasons, although worded differently, to the FIDIC form, for termination
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due to default by the contractor, with the addition of a health and safety
requirement: the Contract may be terminated if the Contractor has substantially
broken a health or safety regulation.
In NZS3910, Section 14 deals with Frustration and Default. The reasons for default
by the Contractor are similar to those listed in NEC and FIDIC: failure to execute
the contract agreement or the contractor’s bond, subletting the whole or
substantially the whole of the works without the consent of the principal,
abandoning the contract or failing to carry out the contractual obligations. Default
by the Principal (sub-clause 14.3) covers similar default reasons as those given in
FIDIC, such as failing to execute contract agreement, failing to pay, obstructing
the issue of certificates, abandoning the contract, and failing to carry out contractual
obligations.
NZS3910 does not list specific events beyond the control of the parties that may
lead to frustration of the contract. It leaves it to the parties to claim that “the
contract has become impossible of performance or has been otherwise frustrated”,
followed by mutual agreement or resorting to the disputes resolution channels.
The FIDIC Conditions deal with Force Majeure and its consequences (Section 19)
and the NEC under Clause 95.
All three forms, NEC, FIDIC, and NZS3910 refer to the risk of non-performance due
to bankruptcy and liquidation of the Contractor. One particular hazard creating a
potential risk of non-performance is the failure of the Principal to pay for the
Contractor’s work. NZS3910 contains a provision for a bond to be furnished by
the Principal, guaranteeing contract payments (Clause 3.2, ‘Principal’s Bond’). In
theory, this clause should provide adequate protection to the Contractor. However,
in times of economic stricture, when work is scarce, it is hard to see how any
contractor could insist on retaining such a clause in the contract. Likewise,
government departments or large industrial and commercial corporations would
probably be averse at including the clause, for obvious reasons. FIDIC includes a
clause equally meant to protect the Contractor: 2.4, ‘Employer’s Financial
Arrangements’, which specifies that within 28 of signing the Contract, the Employer
shall submit “reasonable evidence that financial arrangements have been made
and are being maintained which will enable the Employer to pay the Contract
price...” In turn, this provision may prove to be a piously hopeful statement, since
it is qualified by the word ‘reasonable’. This term and similarly vague words used
in traditional contract drafting can be the cause of disputes and often had to be
referred to the interpretation of a judge, after the parties have differed in their
own interpretation of reasonableness. NZS3910 also still follows tradition — for
example, when providing for the payment of interest to the Contractor when there
occurs “an unreasonable delay in the issue of a certificate...” (clause 12.7, ‘Interest’).
This implies that any specific term provided for in the Contract for the issue of
certificates is not necessarily a binding obligation of the certifier, who can still
apply ‘reasonableness’ to his or her performance.
The drafters of the NEC have avoided the traps of those traditional ambiguous
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terms for the most part. However, some terms which may still be subject to
interpretation by the Adjudicator or a court of law remain in NEC — for instance,
“insufficient” and “unnecessary”, among the sub-clauses of the Compensation
Events. However, clause 17 is designed to manage such problems, by dealing
specifically with Ambiguities and Inconsistencies in the Contract as soon as they
are identified. Only if the Project Manager’s determination of the ambiguity or
inconsistency is not acceptable to one or both parties would the matter be referred
up to the Adjudicator.
FIDIC is an international form of contract, whose previous issues have been adopted
by the international development banks within their standard bidding documents.
Since the banks lend primarily to governments which have sovereign rights, FIDIC
has now adopted in its contract form the right of the Employer to “terminate the
Contract, at any time for the Employer’s convenience...” This provision had been
included hitherto by the banks within the Special Conditions, but is now enshrined
in the core clauses of FIDIC, and the inherent risk merits consideration by companies
embarking into contracts in areas of political or economic instability.
The risks of delay in performance of the contract and cost over-runs
Bunni8 identifies mechanisms for dealing with delay in performance and cost
overruns. The first stage is to establish the claims and counterclaims that are
likely to occur that could cause either event (lateness or extra cost) to happen.
Bunni suggests that:
“Claims will very often arise in a traditional construction contract
because it is perhaps the only contract where the price of the end
result is defined before the process of ‘production’ event starts”.
He then goes on to say that:
“...little or no margins are left for future unknowns in a long and
complex period of construction...any change between what was
assumed and what actually happens may form the seed for a claim.”
Bunni categorises the claims for dealing with delay in performance and cost
overruns into claims arising out of the contract, based on a specific remedy as a
result of a specific event, which may or may not be a breach; claims under the law
of torts; claims where no contract exists; and ex-gratia claims (i.e., “where there
is no legal basis but rather some commercial sense in making a payment”).
Contracts must assist in dealing with delays and cost overruns arising from specified
events. Clauses in the NEC, FIDIC and NZS3910 deal with extensions of time,
variations (or “change of work information” and “compensation events” in the
NEC), and liquidated damages. FIDIC and NZS3910 use conventional ways of
dealing with variation claims (under Section 13 for FIDIC and Section 9 in NZS3910)
whereas NEC uses a different approach (defined in Clause 6, Compensation Events).
8 See footnote 7.
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In FIDIC and NZS3910, the sections follow a similar pattern, containing the right
to vary (or “variations permitted”), variation procedure, and valuation of variations.
In the FIDIC form, the Section on Variations and Adjustment includes sub-clause
13.2 (“Value Engineering”) which gives an option for the Contractor to submit
proposals to accelerate completion, reduce costs, improve efficiencies or otherwise
propose design or constructivity improvements that would benefit the Employer.
NZS3910 does not contain such a clause, but does have provisions for a bonus
for early completion (under sub-clause 10.6), thus creating an incentive to speed
up construction.
The approach to variations and extensions of time in the NEC is covered by
Section 6, “Compensation Events”. Sub-clause 60.1 contains a list of eighteen
events deemed to be ‘compensation events’, some of which are traditionally
listed as causes of variations, as in FIDIC and NZS3910: for example, changing the
works information (60.1.1) and unforseen physical conditions (60.1.12).
However, for the most part the structuring of the ‘compensation events’ is aimed
at removing ambiguity by listing specific events that may delay the contractor’s
progress, such as 60.1.3, failure of the Employer to provide something required;
60.1.8, a Project Manager’s or Project Supervisor’s change of decision; or 60.1.11,
an inspection or test by the Supervisor that causes unnecessary delay.
For the most part, the ‘compensation events’ listed in the NEC are dealt with
under NZS3910 Section 10 (sub-clause 10.3 “Extensions of Time”) or FIDIC Section
8 “Commencement, Delays and Suspension”, particularly clause 8.4, “Extension
of Time for Completion”. However, these contracts are not as explicit as the NEC,
and therefore can provide avenues for potential disputes of interpretation of
what constitutes an event leading to an extension of time. The explicit listing of
events in the NEC is a tool for the prevention of disputes.
Other causes of delay, possibly leading to cost overruns, listed in FIDIC are:
measurement changes, adverse physical conditions, hazards resulting in Employer’s
risks, compliance with statutes, price and currency fluctuations, defects and
unfulfilled obligations, suspension, commencement and delays, release from
performance, default and termination. In terms of early warnings for delays or
cost overruns there are requirements in NEC, FIDIC and NZS3910 to provide
programmes and updating them, as found in clause 31, “The programme”, in
NEC, clause 8.3 “Programme” in FIDIC, and clause 5.10, “Programme” in NZS3910.
The “Early Warning” provisions in Clause 16 of NEC also prescribe early warning
meetings at which participants should endeavour to solve time and cost problems
quickly and as they arise, in a spirit of collaboration. FIDIC clause 8.3, “Programme”,
and NZS3910 clause 5.10 deal with handling delays following more traditional
approaches.
The Principal’s Risks in NZS3915
It should be noted that, when the Principal accepts direct responsibility for managing
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the Contract, as is implied in NZS3915, some of the responsibilities for dealing
with risks that could be transferred to a supervising professional (such as The
Engineer or the Architect), under provisions of due diligence in their own
Agreements, are directly assumed by the Principal.
Indemnities and Insurances
The following is a short summary of the provisions for dealing with particular
hazards, and the arrangements in the various contracts in the indemnities and
insurance clauses. In the FIDIC construction contract, indemnities are covered in
clause 17.1 under the Section on “Risk and Responsibility”, whereas insurance is
covered in clause 18. The NEC covers these matters under Section 8, “Risk and
Insurance” and NZS3910 deals with “Indemnity” in Section 7 and “Insurance” in
Section 8.
The most straight-forward analysis of the insurance requirements in a contract
can be found in the NEC, whose clause 84.2 includes a table explaining what risks
need to be insured against, as well as the minimum amount of cover or minimum
limit of indemnity required. This is an example worth considering by drafters of
standard forms. The NEC also contains provisions referring to insurance policies
(clause 85), consequences of the Contractor failing to insure (clause 86), and
insurance by the Employer (clause 87).
Both FIDIC and NZS3910 include detailed provisions pertaining to the indemnities
and insurances required from the contractor. FIDIC contains clauses on General
Requirements for Insurances (clause 18.1), Insurance for Works and Contractor’s
Equipment (clause 18.2), Insurance against Injury to Persons and Damage to
Property (clause 18.3) and Insurance for Contractor’s Personnel (clause 18.4). The
insurance provisions of NZS3910 are subject to review (as shown in DZ3910) but
currently contain contractor’s insurance requirements for contract works and
materials, contractor’s plant, public liability risks and general insurance. NZS3910
also provides for the Principal to insure the Works and against Public Liability in
certain cases.
The Treatment of Disputes in FIDIC, the NEC, and NZS3910 and 3915
The dispute clauses in all the contracts prescribe the procedures following a
disagreement between any of the parties, and the event of a dispute. These vary
between the nomination of a neutral party, the provision of a mediator, and
resorting to arbitration. FIDIC covers these matters under Section 20, “Claims,
Disputes and Arbitration”; the NEC in Section 9, “Disputes and Termination”, and
NZS3910 in Section 13, “Disputes”.
The New Zealand Forms
The first stage to solving a dispute under NZS3910 is the Engineer’s review. The
Engineer in this capacity is required to be working independently of the Principal
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and Contractor, assessing the merits of the dispute, and giving an independent
decision. This places the Engineer in a difficult professional position, particularly
when the dispute is about valuation and certification of the Contractor’s work,
functions that have been performed by the same Engineer. Clause 13.2 details the
process for the “Engineer’s Review”. In sub-clause 13.2.1, the Engineer is required
to give a decision in writing on any difference or dispute, and can modify it if
deemed necessary, unless it becomes “final and binding” under Clause 13.2.4.
However, see the discussion of this last sub-clause below.
Under 13.2.2, the contract provides for the Engineer and the Contractor to meet
and try to solve a dispute ‘amicably’. At this stage it is not clear what the role of
the Engineer is, i.e. acting on behalf of the Principal (and therefore more likely to
view the dispute from the principal’s side), or independent of Contractor and
Principal as a pseudo-mediator (and therefore expected to try and come up with
a compromise situation).
However, in 13.2.3, the dispute can, with the consent of the Principal, be submitted
to an agreed expert “...with a request to make a recommendation to assist them
to resolve the matter”. It is assumed from this that the Engineer is now acting on
behalf of the Principal, submitting the Principal’s side of the dispute to the expert
or (taking a perverse interpretation of this procedure) on his own behalf, if the
dispute refers to a decision by the Engineer.
Sub-clause 13.2.4 makes reference to a ‘formal decision’ given to the Principal
and Contractor by the Engineer: here the Engineer is acting in an independent
capacity. However, the same sub-clause refers to the parties “...awaiting a
recommendation from the agreed expert...” without a setting a limit to the time
the ‘expert’ can spend considering the problem and issuing a recommendation.
This could extend the time the conflict has been festering, thereby deepening any
problems and animosity between the parties. It has been argued that, if the
expert does not come up with a decision, the parties (Principal and Contractor)
can refer the matter back to the Engineer. In short, back to square one, and start
again.
A further problem of sub-clause 13.2.4 is the determination of the Engineer which
becomes “final and binding”, subject to 13.3 and 13.4. These clauses refer to
Mediation and Arbitration, respectively. It follows that the Engineer is not empowered
to issue ‘final and binding’ decisions.
The above discussion suggests that there is room for improvement in the dispute
resolution section of NZS3910. Perhaps the drafters should consider including a
‘neutral’ within the contract, as a means of dispute prevention, rather than
resolution, which implies that the dispute has been allowed to arise and possibly
fester. Indeed, after the Engineer’s determination, and the good offices of the
‘expert’, the procedure moves straight to mediation and arbitration. In other
words, persons strange to the Contract are brought in to assist in resolving an
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issue in a project that may have been running for some time. Apart from having to
bring these external mediators or arbitrators ‘up to speed’ with the development
of the Contract, there may be special circumstances in its execution which may be
well known to some of the participants, or may have been forgotten or not
recorded, and could have direct bearing on the problem.
In NZS3915, the Engineer is no longer part of the Contract. The dispute must
therefore be referred to a third party, an expert who is “...a suitably qualified
independent person appointed by agreement of the parties.” Sub-clause 13.2.2
provides the mechanism for appointing such an expert. It states that:
“The Expert may be appointed before work commences ...or at any
time during the carrying out of the Contract Works...appointed
generally for all disputes...or specifically for any particular dispute.”
The expert is expected to act fairly and impartially, provide a decision in writing,
with reasons for the decision, if requested. Since NZS3915 has been formulated
for generally smaller contracts of relatively short duration, where supervision by
the Principal may be possible, in this case the flexibility provided for appointing
the expert “generally or specifically” is warranted. However, if there is a case for
appointing the expert generally for all disputes, it would be wise to require him or
her to visit the site at specified regular intervals and wherever a problem or
change in circumstances arises.
FIDIC and the NEC
There is a different first stage mechanism for solving disputes under the FIDIC
construction contract. Under the New Red Book, the Engineer is no longer part of
the dispute resolution process, as in previous versions of FIDIC. Under clause 20.1
the Engineer is required to provide a decision on the contractor’s claim. If the
Engineer declines the claim, the Engineer must provide detailed comments.
Subsequent to this statement, there is no provision for the Engineer correcting or
modifying a decision, as in NZS3910. The next step is to refer the settlement of a
dispute to a Dispute Adjudication Board (DAB), a neutral person or panel appointed
ab initio to act throughout the execution of the project.
The reason for the removal of the Engineer from the dispute resolution process in
the FIDIC contract form is suggested by Booen and Jaynes.9 They point out that:
“Dispute (Review) Boards have been in use world-wide since 1995
on projects receiving financing from the World Bank and the Asian
Development Bank. They are a major change from the older practice
of using the Employer’s Engineer as the maker of pre-arbitral
decisions...”.
Further comments about the replacement of the Engineer in the process can be
9 Booen, P L and Jaynes, G L, The FIDIC 1999 Forms of Contract, published electronically by FIDIC: www.fidic.org/
resources/contracts (2001).
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found in a paper by Seppala.10 When discussing the difference between the new
FIDIC conditions of contract and the old conditions of contract, Seppala points
out that “The provision for the DAB to replace the engineer for the settlement of
disputes ...may be the most favourable of the innovations in the new Books from
the contractor’s point of view”. One may also add the Employer as a beneficiary,
since the expeditious resolution of disputes directly affects the successful
completion of a project.
Clause 20.2 of FIDIC requires disputes to be submitted to the board for a decision.
The DAB is formed by either one or three suitably qualified persons. If a panel of
three, each party nominates one member and the third member is mutually agreed
upon by the parties. The DAB is appointed at the beginning of the contract and
remains in place until the contract is completed. Clause 20.3 outlines the procedure
for appointment of the DAB member(s), and clause 20.4 the mechanism to be
followed by the Dispute Adjudication Board to reach decision.
The FIDIC form draws attention to the role of the DAB, stating that “...the Dispute
Adjudication Board acting as a panel of expert(s) and not as arbitrator(s), shall
give notice of its decision to the parties”. If the parties are dissatisfied with the
decision then they move to the next stage of dispute resolution, which is “Amicable
Settlement” (clause 20.5) and, failing this, Arbitration.
Adjudication by a neutral is also part of the first stage of the dispute resolution
process under NEC. A dispute under the ECC option is submitted to an Adjudicator.
The Adjudication Table in clause 90.1 outlines a mechanism for submitting a
dispute to the adjudicator. For instance, if the dispute is about an action of the
Project Manager or Supervisor, then the Contractor may submit the dispute directly
to the Adjudicator. This differs from NZS3910 where the dispute may be submitted
to an expert “...with the consent of the Principal...”.
The NEC states that:
“It is the intention that all disputes should be resolved by an
Adjudicator who is jointly appointed by the Employer and Contractor
and is able to act independently.”
 The adjudicator in the NEC is appointed at the beginning of the project and
named in the Contract Data, thus becoming one of the project participants, in so
far as they are available to resolve any dispute as it arises. The adjudicator is
there to make a “...quick decision where the parties are unable to agree”.
There is a considerable difference in the approach followed in the appointment of
an external expert in FIDIC and the NEC, and NZS3910: whereas in the former the
neutral(s) are appointed ab initio, the New Zealand standard provides for the use
of ad-hoc experts when particular disputes occur, meaning that the person must
first become acquainted with the project and the nature of the dispute.
10 Seppala, C R, FIDIC’s New Standard Forms of Construction Contract: an Introduction, published electronically
by FIDIC: www.fidic.org/resources/contracts (2001).
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Further steps
The NZS3910 and 3915 provisions require the dispute to be referred to Mediation
after a recommendation of the ad-hoc expert has failed to resolve the dispute.
Sub-clause 13.3.3 sets out the role of the Mediator, who must “...discuss the
matter with the parties and endeavour to resolve it by their agreement.” This sub-
clause also has an important provision requiring that “All discussions in mediation
shall be without prejudice, and shall not be referred to in later proceedings.”
Should the mediation fail, the dispute then escalates to the next step, Arbitration
(clause 13.4). The arbitration award is final and binding.
The provision of Mediation as an intermediate step is a major difference with
both the NEC and FIDIC, which proceed to arbitration if the recommendation by
the Adjudicator or DAB is not accepted by the parties. However, FIDIC clause 20.5
refers to an ‘amicable settlement’: if there is dissatisfaction with the DAB’s decision,
then “...the parties shall attempt to settle such dispute amicably before the
commencement of arbitration”.
The NEC makes reference to review by a tribunal, whether arbitral or the courts of
law. The guidance notes state that:
“The Employer must choose and insert in the Contract Data the
tribunal which will settle a dispute if either party does not accept
the Adjudicator’s decision. The choice will either be arbitration or
the courts.”
 However, the guidance notes further state that:
“...if arbitration is available under the law of contract ...it is strongly
recommended that arbitration is chosen”.
The guidance notes continue by pointing out that:
“The rationale for arbitration remains important particularly for
disputes upon technical matters for which an arbitrator experienced
in the technical context of the dispute is preferable to the courts”.
NEC and FIDIC provide that the recommendations of the Adjudicator and the DAB
(respectively) can be used as evidence in the arbitration process. For instance,
FIDIC clause 20.6 states that:
“The arbitrator(s) shall have full power to open up, review and
revise any certificate, determination, instruction, opinion or valuation
of the Engineer, and any decision of the DAB, relevant to the dispute.”
 NZS3910 and 3915 provide for the arbitrator to “open up, review, etc. ...” the
decisions and determinations of the Engineer, but the arguments put forward by
the parties to the Engineer, and the proceedings of the mediation shall remain
confidential, vis-a-vis the arbitrator.
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The Future for New Zealand Standard Conditions of Contract
As mentioned previously, a review of NZS3910 is currently (July 2002) being
undertaken and the draft document, DZ3910, is available for public comment.
According to the drafters, the revised 3910 document “...is largely in response to
industry concern about difficulties in obtaining insurance that complies with the
standard and in obtaining certificates that confirm that the required insurance is
in place.” (Standards New Zealand, 2002).
DZ3916 is a new standard contract form being developed for design and construct
contracts for a ‘greenfields’ projects (similar to the FIDIC EPC/Turnkey contract).
Standards New Zealand suggest that:
“...this form of contract has the ‘Principal’s requirements’ as its
basic document. The Principal’s requirements may vary widely in
the detail that they contain from being a brief concept description
to a partially complete design. An optional provision provides for
the Principal’s design consultant to become the responsibility of the
Contractor by a process known as novation.”
(Standards New Zealand, 2002).
The development of new forms of contract in New Zealand in line with international
contract forms, but developed for the local market using local knowledge, makes
it hard to visualise that the use of a radically different form such as the NEC may
become extended in the country. Although the NEC has many innovative aspects
to recommend, the size of the New Zealand market and the development of local
forms for particular New Zealand conditions make it difficult for an imported new
form to have an immediate impact. This, together with the industry’s and the
Courts’ understanding of tried and tested clauses of NZS3910, means that unless
the benefits of the NEC can be clearly seen by the industry, the current contract
forms (and their updated versions) are likely to continue to be in general use.
However, with the increasing internationalisation of the construction industry and
new approaches such as alliancing and partnering, which require different forms
of agreement, New Zealand contract forms will need to be developed to adapt to
the changing situations and incorporate similar flexible arrangements currently
found in NEC.
Against this reasoning, we must not lose sight of the fact that the genesis of
NZS3910 has, in essence, followed the development of the British models, notably
the Institution of Civil Engineers’ Conditions of Contract, which have also been
the basis for the international forms issued by FIDIC. Will there be a case for the
NEC, a pioneering new form also produced by the same Institution, eventually
becoming a model for a revolutionary new series of New Zealand standard forms?
Conclusion
This chapter has provided a comparison of the standard mechanisms available
for contract administration in New Zealand (contract forms issued by Standards
108
The NZ Standard Condirtions of Contract
New Zealand) and the new forms published by the Institution of Civil Engineers
(the NEC) and the International Federation of Consulting Engineers (FIDIC). Particular
focus has been given to the treatment of risk and the differences and similarities
in the dispute resolution processes. Whilst all contract forms treat the basic
contract principles, and deal with risk distribution and treatment in similar ways,
the major differences arise in respect of (a) language and presentation, where the
NEC has marked a significant departure from the traditional models, and (b) the
prevention of disputes, which is provided for in FIDIC and NEC, but not so in the
New Zealand standards, that rely on the resolution of disputes, i.e. an ex-post
approach. It is this last feature which would be a desirable improvement to be
introduced in the NZS forms.
109
8 New Opportunities ThroughCulture Change
compiled by Jason Le Masurier
Abstract
The first part of this chapter examines the current cultural environment of the construction
industry, and reviews the changes of attitude that are necessary for the industry to progress,
from stances of confrontation and adversarial relationships, to a culture of collaboration
and mutual gain. The text draws from papers presented by Martin Barnes, Nael Bunni and
William Stockman at the Conference on The Contract in Successful Project Management, in
Christchurch, February 2002, and from other sources, notably the Rethinking Construction
report of the UK government.
Starting from a concept of levels of maturity or enlightenment in the industry, the chapter
considers the various ways that the industry is moving towards a more integrated approach
and the benefits that accrue from this. The main focus is on partnering, covering the
definition of the term, the mechanisms by which it is commonly promoted through contracts
and partnering charters and the importance of the project culture in making it work. An
advanced form of partnering, based on relational rather than transactional contracts, is
also presented.
The transition from adversarial relationships to the ideal of partnering is to some extent
evolutionary and this chapter considers some of the blocks to partnering and alternative
methods of procurement that can be considered steps on the path, all of which involve a
degree of integration of processes and teams. This covers for example joint ventures and
the various forms of design, build, finance and operate. Finally, the first part of the chapter
considers how culture change or evolution can be facilitated using the example of the
Rethinking Construction initiative in the UK.
The first part of the chapter is put into practical context with a paper written by Tim Wood,
Deputy Project Manager for the Tamar Bridge Widening. This paper followed from a
presentation given by Wood at the CAE Rethinking Construction meeting in Christchurch in
March 2002 and is a frank example of how partnering under the New Engineering Contract
works in practice. It covers the entire process from the early decisions, through selection of
designer and contractor and working with the whole supply chain during design and
construction. Wood’s paper emphasizes some of the key issues for consideration when
partnering and highlights the influence that an enlightened client can have over the successful
outcome of a project.
Examples of Partnering Agreements, prepared by Nael Bunni, are given at the end of the
chapter.
110
New Opportunities through Culture Change
111
Culture Change
Jason Le Masurier
Introduction
In the past,  many construction projects have been dogged by adversarial
relationships and this type of culture still has a strong influence in the industry.
However, there is currently a steady move towards collaborative relationships.
Working collaboratively, rather than confrontationally, opens up new opportunities
and will clearly improve results in terms of project time, cost and job satisfaction
for those involved.
Independent or Interdependent?
As the construction industry has matured in certain countries, so the relationships
developed on construction projects have matured. A model of relationships that
helps describe the change is given by Covey.1 His model is a ‘Maturity Continuum’
that moves from dependence to independence and on to interdependence. Covey
says that on the maturity continuum, dependence is the paradigm of you – ‘You
take care of me’ or ‘I blame you for the results’. Independence is the paradigm of
I – ‘I can do it’, ‘I am responsible’. Interdependence, Covey says, is the paradigm
of we — ‘we can do it; we can co-operate we can combine our talents and
abilities and create something greater together’.
Covey asserts that “The current social paradigm enthrones independence. It is
the avowed goal of many individuals and social movements ... as though
communication, teamwork, and co-operation were lesser values ...”
On partnerships and agreements Covey says “Traditional authoritarian supervision
is a win/lose paradigm”. Partnership agreements shift the paradigm of productive
interaction “from positioning to being partners in success.” However, he also
points out that: “An agreement means very little in letter without the character
and relationship base to sustain it in spirit. So we need to approach win/win from
a genuine desire to invest in the relationships that make it possible ...”
Traditional forms of contract generally regard each party as independent. This is
based on the assumption that if role, responsibility and risk requirements are
clearly assigned to each party, and each party complies with their allotted
requirements, then the project will be successful. However, this model has been
proved to be inappropriate for all but the most simple of construction projects.
The various parts of a project cannot be successfully carried out by separate
parties in isolation from each other, but rather there needs to be integration and
feedback at all stages. The interdependence of construction project processes
and the construction supply chain is recognized in certain industry sectors, and
among some of the larger clients and contractors in countries that have a well-
developed construction industry.
1 S R Covey, The Seven Habits of Highly Effective People, Simon and Schuster, London, 1992.
112
New Opportunities through Culture Change
It is the transition from an independent to an interdependent attitude that defines
the current industry culture change. Once a supply chain or industry sector has
reached this level of maturity, there arise significant opportunities to adopt
performance-improving strategies, including, for example, lean construction (see
Box 5). A fundamental indicator of the maturity of the industry can be found in
the type of agreements used by the parties and the extent to which they promote
interdependence.
Design and build contracts could be considered the first stage in recognition of
interdependence — they promote the integration of design and construction.
However design/build can break down into adversarial relationships between a
contractor and its sub-contract designer. True interdependence relies on teamwork
— which is generally referred to as partnering. Partnering agreements range from
traditional forms of contract with partnering charters attached, to contract forms
based on partnering and, ultimately, agreements to work together for mutual
benefit without reliance on formal contracts.
It is worth emphasizing that the recognition of interdependence is not new. Today,
and throughout the history of construction, when the people involved in a project
are sufficiently mature and experienced, they will generally work in a spirit of
cooperation to some extent, regardless of the form of contractual arrangement.
However, in the absence of enlightened people who recognize the mutual benefits
of collaboration, the type of contractual arrangement can have a significant effect
on the relationships that develop. The contract effectively ‘sets the scene’; if it is
fair and equitable then people will be encouraged to work together; if it is divisive
then people can be unwittingly led into conflict. This concept is developed further
in Chapter 4.
Challenging the obligation paradigm
In reviewing contract relationships, Stockman2 pointed out that contracts are all
about obligations, with a good contract clearly defining each parties obligations
in simple terms, without ambiguity, so that at contract completion both parties
achieve a ‘win’ in terms of results. However, he suggested that reality typically
falls well short of this objective, due to the inadequate structures and relationships
that underpin the various components of the contract, and a lack of clarity over
the scope of each party’s obligations. The current tender and contract paradigm
focuses on obligations and risk transfer, and often results in a ‘win/lose’ or even
a ‘lose/lose’ result, not only for the owners and companies involved but also for
individuals and their families.
Stockman proposed that instead of hardening and complicating the obligation
side of tendering and contracts we should consider a new paradigm that strives
to consistently achieve ‘win/win’ results — through contracts that:
• rely on simple terms and conditions;
2 William Stockman,  “Challenging the obligation paradigm in contracts” – presented at the CAE Conference on
the Contract in Successful Project Management, in Christchurch, February 2002.
113
• share risk and reward so that sponsors, advisors and delivery companies share
incentives;
• encourage innovation, cooperation and teamwork;
• achieve better value for money; and
• encourage the building of strong long-term business relationships.
Stockman illustrated his point by comparing the common current practice of
tendering and contracting and the associated outcomes — with simple human
desires and objectives that we all strive for in everyday life, as shown in Table 1.
What do we really want
to achieve?
Under the ideal
contract I would have:
Under many forms of
contract I actually have:
Health, family, job
satisfaction, personal life
Good health, enjoy the
journey, success and job
satisfaction, have time to
spend with family and
friends, some adrenaline
highs, time to relax
Poor health, sleeplessness,
stress, significant amounts of
overtime, no time for
family and friends, no time to
relax, no enjoyment — "a
tough industry"
Profit Make a fair and
reasonable profit —
invest in the future of
my company, profit
share with employees
Skimpy profit at best, often a
loss or less than necessary to
cover overheads, under
resourced projects and
sometimes bankruptcy
Relationships Build long term
friendships and business
relationships
Conflict /Dispute —
Inefficiency from the outset
Administration Efficient / simple Inefficient / costly — numerous
onerous requirements
Expectations Exceed expectations
‘win/win’ results
‘win/lose’ or
‘lose/lose’ results
Table 1: Ideal vs adversarial contract management (after Stockman)
3 Rethinking Construction – Report of the Construction Task Force,  Department of the Environment, Transport
and Regions, 1998,  HMSO, London.
Partnering
Definitions
The better and more successful firms are increasingly using partnering in place of
traditional contract-based procurement and project management. Partnering has
been defined as:3
“...two or more organizations working together to improve
performance through agreeing mutual objectives, devising a way for
resolving any disputes and committing themselves to continuous
improvement, measuring progress and sharing the gains.”
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New Opportunities through Culture Change
Another term often used is alliancing. Some people have used the name alliancing
to mean longer-term strategic relationships between two commercial undertakings.
However, following Barnes’ suggestion4 that this usage has by no means gained
wide acceptance or official recognition, the word partnering is used here, in
preference to, albeit synonymous with, alliancing.
Barnes described the various types of partnering arrangement between construction
parties. The simplest form of partnering is where client and contractor agree to
work together collaboratively in the course of one project. The relationship is
used only once.
The next level of complexity is when more than two organisations agree to work
together on a single project. The extreme of this type of partnering is when all the
organisations working on one project agree to work collaboratively. This is the
most comprehensive type of single-project partnering arrangement. It is sometimes
called multi-interface partnering to distinguish it from single-interface partnering,
which involves only two organisations.
Multi-project partnering is the next level of complexity when two organisations
agree to work together over a series of projects or over a period of time that
encompasses a number of projects. Multi-project partnering can be single-interface
or multi-interface in the same way as single-project partnering. Multi-project
partnering is sometimes called programme partnering and sometimes framework
contracting.
Continuous improvement was highlighted by Barnes as a particularly desirable
characteristic of multi-project partnering, following from its long-term nature. There
can be, and usually is, an obligation on both parties to look for continuing
improvement in delivery of the service that the supplier is contracted to provide.
This requires that there should be some method of assessing performance and,
thereby, measuring improvement,  achieved through Key Performance Indicators
(KPIs), which are usually interim measurements of performance. However, Barnes
warned that if such KPIs are not agreed upon and observed, and there is lack of
care and diligence by one or more of the partners, complacency and diminishing
positive results can set in and destroy the very essence upon which partnering
rests.
Barnes described the difficulty associated with a contract tailored to administer a
series of projects over a long time, in that it often cannot be based upon a
precise specification of the work to be done in later stages. This has given rise to
the variant of the long-term partnering contract called the ‘Framework’ contract,
when a supplier contracts with a client to do a series of projects, in which the
exact nature of the work to be done is not identified but a pricing arrangement is
agreed upon, on which the parcels of work will be valued as they emerge. In the
UK, local and national authorities are increasingly using framework agreements
4 Martin Barnes,  “Partnering, Alliancing and other Collaborative Approaches” – presented at the CAE Conference
on the Contract in Successful Project Management, in Christchurch, February 2002.
115
for highway, city and utility maintenance.
Partnering and culture
The desire to use the partnering approach, and the presence of the environment
in which it will work are a ‘chicken and egg’ conundrum. As mentioned previously,
successful partnering relies on the culture of collaboration being in place —
conversely, the culture can be promoted by the use of partnering agreements. For
example, a client may award a traditional construction contract to a builder, who
then establishes partnering arrangements with sub-contractors and suppliers.
The client may then be brought into the partnering arrangement through the
culture change on the project. An example of this situation occurred on the UK
West Coast Mainline, as described by Barnes in Box 1.
The opposite situation occurs when the desire to use partnering changes the
culture. For example, public sector clients in the UK are increasingly resorting to
partnering arrangements. Contractors are short-listed for contracts on the basis
of their track record as efficient ‘partners’. Quality assessments of tenders then
ensure that the contractor with the best track record of working collaboratively is
selected. This approach is contributing to a radical change in the culture of the
whole industry — those who cannot work in a collaborative way will eventually
not win any new work. The Tamar Bridge case study at the end of this chapter
illustrates this point, as does the example given by Barnes in Box 2.
Box 1: The West Coast Main Line (Barnes)
This is the main railway from London to Glasgow. There is a very
expensive and long-term programme for rebuilding the railway to
carry more traffic and much faster trains. Work has begun at the
southern end at Euston Station in London. Perhaps the most
important first project was the reconstruction of the track and
signalling from Euston itself. This was a highly complex project made
particularly complicated by the need to maintain the rail traffic during
all the time that the railway was being rebuilt and resignalled.
The project was begun with traditional contracts. The client used
two principal directly-appointed contractors, one for the civil works
and one for the signalling. After a while the two contractors decided
to enter into a partnership with each other in order to facilitate
getting the work done for their mutual client. After this arrangement
had been in place for a while, the client itself joined the partnership.
The partnership which, therefore, completed the project was a
tripartite arrangement involving the use of the target cost type
contract. The work was completed on time and within budget and
was regarded as a great success by all the people concerned.
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New Opportunities through Culture Change
Partnering contracts
It is generally accepted that, whilst partnering is based on a culture of trust and
mutually beneficial relationships, it is necessary to underpin this relationship
with a formal contract that clearly states the responsibilities of each party. To
instil trust the contract should seek to allocate responsibilities logically to the
relevant parties, without unfair onus on any one party. In addition the contract
should be written so that all parties understand it — i.e. in plain language.
The New Engineering Contract (NEC) is a standard form of contract which embodies
single-interface, single-project partnering as an option (see Chapter 6). It is now
well-established and used for a very large proportion of the partnering contracts
in the UK.5 A recently published supplement extends the NEC to cover multi-
interface partnerships and multi-project partnerships.
PPC2000 is an alternative form of partnering contract developed by the Association
of Consultant Architects and is considered to be the main potential rival to the
NEC. The key features6 of PPC2000 are set out in Table 2.
Partnering the whole supply chain can be difficult to achieve; those at the lower
Box 2: Thames Water (Barnes)
Thames Water Company is the company that, amongst many other
things, provides water supply for London and for the Thames Valley
area and also disposes of the water for the same population. They
have a very substantial capital programme, all of which is carried
out using partnering arrangements.
For major single projects, they use single-project partnering together
with target cost contracts. For smaller projects they use framework
contracts, where they have a partnering arrangement with a contractor
to carry out a programme of projects over a period of time in a
particular area. The contractor’s team works alongside the client’s
team in what is called a co-located project office.  This is regarded
as a very important characteristic of the working arrangements for
partnering, by nearly everybody who uses this approach.
The third prong of Thames Water’s capital programme consists of a
large number of very small projects that are towards the maintenance
end of their obligations. This work is done on very long-term multi-
project partnering with heavy use of key performance indicators to
reward continuous improvement and to maintain competitiveness.
5 For further information on how partnering is achieved using the NEC and some interesting case studies see
NEC and Partnering – the Guide to Building Winning Teams, by John Bennett and Andrew Baird. Thomas
Telford Services Ltd, 1 Heron Quay, London, E14 4JD, UK, ISBN 0727729551.
6 David Mosey,  PPC 2000:  First Standard Partnering Contract, Trowers & Hamlins Solicitors (www.trowers.com/
whats_new/PPC2000.htm).
117
Team-Based
Multi-Party
Approach
The Client, the Constructor and all Consultants and key Specialists sign a
single Partnering Contract. This avoids the need for several two-party
professional appointments and a separate building contract and/or
partnering agreement, and substantially reduces Project paperwork. This
single, integrated contract encourages a team-based commitment to the
Project, and should reduce the temptation to hide behind unconnected two
party agreements.
Integrated
Design/Supply/
Construction
Process
Early selection of a Project Partnering Team and the collaborative finalisation
of designs, prices and members of the supply chain encourages the
contributions of the Constructor and its sub-contractors, suppliers and sub-
consultants during the key period prior to start, as well as during supply and
construction.
Key
performance
indicators
PPC 2000 expressly recognises the recommendations of "Rethinking
Construction" and links these to the objectives of the Partnering Team on
each Project. Achievement of these objectives is measured against agreed
Key Performance Indicators.
Supply Chain
Partnering
Finalisation of the supply chain on an open-book basis encourages
partnering relationships with all Specialists, and includes provision for key
Specialists to become full members of the Partnering Team. It is
compatible with the wide variety of sub-contracts used by Constructors,
but those sub-contracts must not conflict with the PPC 2000 terms.
Core Group A Core Group of key individuals representing Partnering Team members
operate an Early Warning system for problems and undertake regular
reviews of progress and performance.
Controls A Partnering Timetable governs the contributions of all Partnering Team
members to partnered activities, including development of designs, prices
and the supply chain, and a Project Timetable governs their activities
after commencement on Site.
Signature of the Project Partnering Agreement initiates the partnering
process, with flexibility for the Constructor to undertake early work on Site
under a Pre-Possession Agreement. However, all necessary Project
details need to be finalised and agreed before the Partnering Team sign a
Commencement Agreement authorising commencement of the Project on Site.
Incentives PPC 2000 provides for agreement of Profit, Central Office Overheads with
encouragement for Partnering Team members to agree shared savings
and shared added value incentives. Payments can also be linked to
performance against KPIs. Value Engineering and Value Management
exercises are expressly recognized.
Risk
Management
PPC 2000 provides a clear system for reducing, managing and sharing
risks and for agreeing Changes openly and equitably. Risk management is
a duty of Partnering Team members, and there is a facility to agree the
balance of risk appropriate to each Project.
Non-adversarial
Problem
Resolution
A Problem-Solving Hierarchy is included of increasingly senior individuals
within each Partnering Team member’s organisation, working to strict time
limits), with further reference of a problem to the Core Group. It also includes
a facility for conciliation or other forms of alternative dispute resolution. These
options are without prejudice to Partnering Team member’s legal right to
refer a dispute to adjudication.
Partnering
Adviser
The Partnering Adviser is an individual with relevant experience who can
guide the partnering process, who can document the relationships,
commitments and expectations of Partnering Team members and who can
provide an additional facility for problem resolution.
Table 2: Key features of the PPC2000 Contract (after Mosey, see footnote 6)
end can easily be omitted from partnering arrangements. However, suppliers of
key components can play a significant role in a large contract, and any project
management group considering partnering should carefully examine the whole
supply chain, to ensure that no key participant is omitted (see the example of
Terminal 5, Heathrow Airport as described by Barnes in Box 3).
Jason Le Masurier
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New Opportunities through Culture Change
Beyond transactional contracts
The term ‘non transactional’ is used to describe the contracts used on Terminal 5
in Box 3. The term comes from Macneil7 who defines a continuum in the forms of
contract. At one extreme are ‘transactional’ contracts, used for example for buying
goods. At the other extreme are ‘relational contracts’, for example marriage.
Miles and Ballard8 suggest that many contract forms currently in use in construction
adhere to the transactional form; they assert that this approach is inappropriate
for all but the simplest of projects and go on to say:
“The next era necessary for the construction industry to move forward
is one of Self-interest, Project Success Motivated Cooperation. This
cooperation must be based upon realistic appreciation and
recognition of the self-interests of the participants in a project. The
contracts must support these self-interests and provide a framework
Box 3: Terminal 5, Heathrow Airport (Barnes)
The client for this project is the company which owns and operates
the main airports in the UK – BAA plc.  The fifth terminal at Heathrow
will be the largest new airport installation in the UK that has ever
been built at one time.  On its own, the terminal’s passenger handling
capacity will make it one of the largest airports in the world.
The project includes four buildings, comprising the new terminal, all
the aircraft stands and taxiways, railway stations, car parks and all
the other ancillary components of a modern airport terminal.
Construction is about to start.
All the contractors and suppliers for Terminal 5 are appointed on
partnering contracts of one sort or another.  This extends not only
to the ordinary design teams for the buildings and the engineering
structures, but also to the suppliers of equipment such as baggage
handling, lifts and all the other electrical and mechanical equipment
necessary for the terminal.  Appointments have been on especially
derived contracts which are called ‘non transactional’. This means
that there has been a strong move away from seeing the contributors
to the project as buyers and sellers.  The whole ethos is that all
organisations contributing to the project are in it in order to make
the completed project better, to work with other people and to help
them achieve their collective objectives.  Most of the early planning
and design work has been carried out on fully cost reimbursable
contracts — contracts under which the client carries all the cost risk.
7 Ian R Macneil (1974), “The Many Futures of Contracts”, Southern California Law Review, Vol. 47:69, University
of Southern California.
8 R Miles & G Ballard, “Contracting for Lean Performance: Contracts and the Lean Construction Team”.  http://
web.bham.ac.uk/d.j.crook/lean/iglc5/miles/miles.htm.
119
for the overall best success of the project. This new era will include
Relational Contracting.”
Writing about the construction industry environment in the USA, Miles and Ballard
describe how Partnering is sometimes used as a ‘patch’9 and suggest:
“...the mixing of the transactional contract with the addition of a
relational Partnering Charter is inherently ambiguous at best and
schizophrenic at worst. What is needed is a cohesive, focused
contracting arrangement that is based on the relational end of the
contract behavioral axis”.
It is worth noting here the difference between a ‘Partnering Agreement’ and
‘partnering’; the former is the intention and the latter is the action. Unless there
is action (‘walking the talk’ in management parlance), then a Partnering Agreement
is not worth the paper it is written on.
There are examples of a movement towards relational contracts in construction.
One initiative is the ‘Virtual Company — Trust and Money’ model proposed by the
Movement for Innovation.10 In this model, each organisation within the supply
chain seconds people to work in a team with the project owner, thus forming a
‘Virtual Company’, in which: “there is no ‘blame culture’, no discrimination; they
each get their predetermined share of the reward, however large or small it may
turn out to be; their interests are therefore irrevocably aligned to the Owner’s.”
The Freeflow Alliance, currently constructing the Grafton Gully project in Auckland,
is an example of the way forward for delivery of complex construction projects
based on relational contracts. The Alliance11 is the project delivery vehicle that
comprises representatives of the Owner, the Designer and the Constructors, similar
in concept to the Virtual Company model, without reliance on a standard contract
form. It is governed by a Board that has similar representation, and it is the Board,
not the Owner, that makes all key decisions relating to the project. All Board
decisions must be unanimous and the Owner has limited power beyond directing
a change to the project scope and terminating the project in certain circumstances.
The principal tenets of the Alliance Agreement are recognition that it is fundamentally
a commercial arrangement, shared risk and reward, and a commitment to a culture
of no blame and high performance. Sharing risks rather than allocating them to
specific parties is fundamental to true partnering and could be used as the test to
determine whether a project is entering into the full spirit of partnering.
Under such a framework, the project delivery team can operate in a truly co-
operative environment with shared objectives. Their focus is entirely on the delivery
process so no energy is expended on contractual positioning and bargaining. All
parties gain or lose together; so individual drivers are always aligned with the
collective drivers.
9 See example in Chapter 9, page 163.
10 Movement for Innovation, www.m4i.org.uk/wgroups/.
11 As described by David Jewell of Fletcher Construction
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New Opportunities through Culture Change
Partnering Charters
The partnering philosophy has developed on many occasions on construction
projects throughout history12, and may be considered by the more mature industry
players as the normal relationship that should exist on all projects. However, the
contract parties may be assisted in developing the partnering philosophy by a
formal agreement to be referred to in particular situations.
In a legal context, Bunni13 suggested that partnering may constitute no more
than an expression of intent between two parties to behave in accordance with a
set of agreed principles. Bunni summarised a number of objectives that are aimed
at by the parties involved in a construction contract through partnering, which
would form the basis of a partnering agreement, as follows:
• Management and co-ordination. One of the most important aspects of avoiding
conflict on a construction project is the provision of an efficient and effective
mechanism for communication and flow of necessary information. This mechanism
should extend throughout the project organization from the work-face through
to senior management. To facilitate this, partnering structures generally provide
for the creation of steering committees or for regular meetings between the
parties. Some partnering agreements provide for the whole project to be directed
by an integrated board. Often a permanent core of key personnel is dedicated
to the project, in order to foster and maintain the partnering approach.
• Early warning /joint problem-solving. It is generally accepted that problems and
any subsequent conflict that may arise should be resolved as soon as practicable.
A partnering agreement would usually include an early warning system designed
to act as a net to isolate any problem that is either envisaged or may occur on
a construction project. In particular, hazards and risks that may cause loss or
damage should be identified, analysed and managed. Risks of economic
and/or time loss should also be part of the process of management where the
parties could give each other early warning of possible problems that might
lead to adverse time, cost, quality or safety consequences.
• Variations. Possible conditions that may be particularly relevant for partnering
include: an ability for the contractor to initiate variations, whether or not the
client has the unfettered discretion to refuse (in some cases, the client may be
obliged to agree such variations if it is objectively reasonable to do so). Some
forms of contract allow for value engineering clauses or provisions for incentives
in respect of contractor-initiated variations that enhance safety or quality or
that reduce time or costs. Where variations arise from external circumstances
(for example, a change in the law), obligations of co-operation to identify solutions
which mitigate time and cost penalties could be extremely helpful and result in
the elimination of possible future conflict.
12 see, for example, the Mangla Project 0n page 124.
13 Nael G Bunni,  “Partnering, alliancing and other collaborative, non-confrontational approaches: Examples of an
emerging new paradigm” - presented at the CAE Conference on The Contract in Successful Project Manage-
ment, in Christchurch, February 2002.
121
• Monitoring of Progress. If the time for completion of the whole or certain sections
of a project is of the essence, partnering agreements are an excellent vehicle to
achieve such results.
• Defects and repair work. This is another area that may be dealt with in a
partnering agreement. The parties may decide on how to co-operate to identify
defects, to programme remedial works and to agree working methods, including
acceptable alternatives and payments. The cost of repair work is generally
taken into account in calculations for incentive purposes.
• Incentives. Incentive payments are likely to be linked to cost, time, quality and
safety. In some cases the contractors’ profit, overhead, and perhaps some element
of his cost recovery, will be at risk if targets are not met.
Examples of each of these issues are covered in the Tamar Bridge widening case
study, subject of the next paper. Examples of partnering charters by Bunni are
reproduced at the end of this chapter.
Sharing risk and reward
Many partnering arrangements use a pain/gain sharing formula. In their simplest
form, these can be a simple 50/50 share or some other split, of savings or cost
overruns within certain limits. However, more complex arrangements can give
added incentives — such as the contractor taking all of the first 5% of savings or
overruns; any extra being shared in some proportion with the owner. Owners may
choose to invest any savings they obtain back into the project, which can also
benefit the contractor in terms of revenue from extra work. Barnes described an
example of such an arrangement on the Channel Tunnel Rail Link (see Box 4).
Jason Le Masurier
Box 4: The Channel Tunnel Rail Link (Barnes)
This is the new railway, over seventy miles in length and including
some very long tunnels, connecting the Channel Tunnel and the
south coast of England to central London and to other railways in
central London.  All the various civil engineering, building, and other
types of engineering work are partnering contracts let under the
New Engineering Contract.  The main option being used is the target
cost option. In this the contractors are paid actual costs and there is
a pain/gain share arrangement depending upon on whether the actual
cost exceeds or is less than the target agreed at the beginning. The
client carries the majority of the cost risk.
The arrangement has worked very well on the first section that is
the southern half of the route.  Most importantly, the financiers are
happy with the arrangements and are reported to be backing the
construction of the second half with very much more confidence as
a result of the effectiveness of the partnering and contracting
arrangements on the first half.
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New Opportunities through Culture Change
Alternative procurement methods
Clients who wish to transfer all the risk for a project to another party may attempt
this using traditional forms of contract with additional or modified clauses. The
risk of this approach backfiring on the project and the client is discussed by Firth
in Chapter 10.
An alternative approach, that is increasingly being used world-wide, is that of
assigning total responsibility for delivery of infrastructure or a service to a single
entity, which includes the builders and financiers. The structure of such a project,
as presented by Bunni14, is shown in Figure 1, where the project company has full
responsibility for delivery. This project company would typically be a consortium
of large construction services providers, backed by financiers. Providing the party
responsible for delivery is ‘mature’, in the sense discussed earlier, they will
understand the importance of, and will be in a position to establish a collaborative
culture between, the project stakeholders. An example in the UK is the Autolink
company — a consortium of Amey PLC, Sir Robert McAlpine, Ltd, Taylor Woodrow
Construction Ltd and Barr Holdings Ltd, established to design, build, finance and
operate the new M6 motorway in Scotland.
When such contracts are used by public bodies in the UK, they are referred to as
Private Finance Initiative (PFI) projects, which Bunni defined as:
“transactions pursuant to which the national, provincial or local
Government engages a private entity to develop, maintain and operate
an infrastructure facility in exchange for the right to charge a price,
Government
Concession
Agreements
Project
Company
Loan & Security
Documents
Construction
Contract
O & M
Contract
Shareholders &
Equity Funding
Agreements
Lenders Contractor Operator Shareholders
Figure 1: A typical structure of a private finance arrangement (after Bunni)
14 Nael G Bunni,  “Other International Contracting Approaches: The ‘PFI’ or the ‘EPC’ Contracts” – presented at the
CAE Conference on the Contract in Successful Project Management, in Christchurch, February 2002.
123
either to the public or to the Government, for the use of the facility
or the services or goods it generates”.
Another term is Public Private Partnership (PPP) defined by Bunni as “A partnership
between various public administrations and public bodies on the one hand and
legal persons subject to private law on the other for the purpose of designing,
planning, constructing, financing and/or operating an infrastructure project”.
The range of contract acronyms in this family is many and varied and Bunni
defined the following:
• ‘EPC’ is intended to mean ‘Engineer Procure Construct - Contract”;
• ‘BT’ is intended to mean ‘Build, Transfer’;
• ‘BOT’ is intended to mean ‘Build, Operate, Transfer’;
• ‘BOOT’ is intended to mean ‘Build, Own, Operate, Transfer’;
• ‘BOO’ is intended to mean ‘Build, Own, Operate’;
• ‘BLT’ is intended to mean ‘Build, Lease, Transfer’;
• ‘BRT’ is intended to mean ‘Build, Rent, Transfer’; and
• ‘DBFO’ is intended to mean ‘Design, Build, Finance, Operate’.
Financiers may not understand the importance of the collaborative approach and
Bunni went on to say that financiers and banks dislike risk and would prefer to
shift the risk to the contractor, a point also made by Tuohey in Chapter 4. Accordingly,
a private finance arrangement means greater risk being allocated to the contractor,
a greater risk matrix and a greater intensity. The new matrix of risk, according to
Bunni,  includes: political risks, currency risks, stability of government, unforeseen
ground conditions, fitness for purpose in design, technology risk, and many others
that are usually either allocated to the employer or have much lower intensity in
traditional forms of contract.
However, Bunni noted that such higher allocation of risk means higher rewards to
the contractor should the risks not eventuate or, if they do, their effect could be
mitigated. On the face of it, this may seem like the situation warned of earlier,
where all risks are loaded on to the contractor. However, the difference here is
that the contractor has far more freedom to integrate all aspects of the project —
design, construction and operation — to balance the risks and optimise the
outcome.
It is worth noting at this point that certain regulations may prevent public sector
clients from negoitating partnering agreements. However, experience in the UK is
showing that public accountability and partnering can go together.15 One approach
Jason Le Masurier
15 see case study of the Tamar Bridge widening project on page 131 and for other examples see Local Govern-
ment Task Force www.lgtf.org.uk.
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New Opportunities through Culture Change
is to use a two-stage tendering process, where it is made clear from the start that
the winning tenderer will be invited to enter into a partnering agreement.
Partnering and the International Development Banks
The World Bank and the regional development banks (Asian, Inter-American, African
and European) lend to governments and government departments which, in turn,
must contract out the acquisition of construction projects, goods, and services
using those funds. The guidelines that borrowers must follow require that
procurement be carried out competitively, opening up access to contracts to all
eligible bidders. An award of contract should be made to the ‘lowest, qualified
responsive bidder’. This is a strict rule, which precludes strategic alliancing or
long-term partnering in most cases. There are exceptions — particularly when the
direct executors of a project are the community that benefits from the new economic
asset.
Araujo16 mentioned a project in Argentina, where the World Bank had financed
“5,000 houses, constructed directly by the communities themselves in a very
decentralized and participative approach. This was a great partnership, not with
the contractors, but with the final users of the loan.”
Forms of partnering have been used in past World Bank projects; for example,
Mangla Project, in Pakistan17, completed in the late 1960s, and costing over
US$500 million. At the time, it was the largest project financed by the World
Bank, and the largest construction contract let on unit prices. It was a huge
challenge for all involved: the Water and Power Development Authority of Pakistan;
Binnie & Partners, project consultants, and the contractors, a consortium led by
Guy F Atkinson of the USA. Although there was no formal partnering arrangement
or charter established, all parties worked in a spirit of collaboration, to resolve
the many problems that arose during construction. The project was an unqualified
success.
Internally, the World Bank has participated (as the Principal) in a partnering
arrangement with the Architect and head Contractor for its own US$320 million
Headquarters Construction Project.18 Partnering was introduced as a means to
resolve severe contractual problems th at had plagued the project in its initial
phase, from 1989 to 1993. Once a partnering approach was agreed upon, and a
charter drafted and signed by all participants down to mid-level managers,
communications improved, and an effective system for the expeditious resolution
of problems on site was put in place. The improved project administration also
required a change of attitude by all participants. The project was completed
leaving no claims or issues unresolved.
16 Armando Araujo,  “World Bank - Points of View and Issues”, see  Appendix A, page 257.
17 Details can be found in Proceedings of the Institution of Civil Engineers, London: Nos. 38 (November 1967)
and 41 (September 1968).
18 Ernesto Henriod, own experience as Director of the Project from 1994 until completion in 1998.
125
When the contracting party is a government, issues of transparency and continuity
of management policy arise.19 A senior official faced with a decision to introduce
informal partnering, or partnering based on a charter which does not strictly
follow the procurement legislation of the country, would feel exposed to being
penalized, or loss of his or her reputation after a change of government. Therefore,
unless the rules are written into the procurement laws or by-laws, government
officers would have difficulty in entering into a partnering agreement.
There is also an issue of trust, in the less developed countries. When contractors
come from industrialized or more advanced countries, they can be perceived as
exploiters, capable of abusing the trust of less sophisticated local partners or
government officials. Partnering arrangements could also be perceived as a disguise
for corruption, often the bane of the poorer countries.
Construction Joint Ventures
Whilst true partnering can be difficult to achieve on international projects through
formal contractual means, joint ventures are often promoted and when successful
provide many of the benefits associated with partnering. In this sense joint ventures
could be considered a ‘stepping-stone’ towards partnering.
The main purpose of joint ventures is the pooling of resources of two or more
companies to meet the requirements of a project. Joint ventures provide a
mechanism to produce an organisation or team with particular expertise, to respond
to the fast-changing market. Many large- to medium-sized construction companies
use joint ventures effectively to win construction contracts that they would not
have qualified for on their own.
In developing countries joint ventures have particular appeal. For example local
construction companies, which may have plenty of labour but lack managerial of
technological expertise, will often form joint ventures with companies from more
advanced countries, for mutual benefit. The benefits to local companies include
technology transfer and exposure to the challenges of larger projects. The overseas
companies gain from entry to new markets and access to local labour forces.
Joint ventures will clearly be most successful if the relationships between the
parties are based on trust and mutual respect and the share in risk and reward is
distributed fairly. When the joint venture companies are of similar size and are
familiar with the environment in which they are operating, the challenges they
face are similar to those discussed earlier in relation to partnering. However,
when companies from different cultural backgrounds come together in international
joint ventures the challenges are much greater.
In a paper by Lu and Tan20 experiences of joint ventures in Asia are discussed,
highlighting the difficulties of delivering business benefits from situations in which
Jason Le Masurier
19 Araujo, see footnote 16.
20 Lu Youjie and Tan Wee Teck  “Construction Joint Ventures in Asia” – see Appendix A, p 279.
126
New Opportunities through Culture Change
control is split between two or more partners.
Promoting Culture Change — a UK Perspective
The UK industry
During the 1970s, 1980s and early 1990s the UK construction industry was typified
by adversarial relationships, projects overrunning in terms of time and budget
and high dissatisfaction among clients over the quality of products and services
they received. Since the industry accounts for 6%-8% of UK GDP, its inefficiency
was clearly costing the country dearly. The UK government, as the largest client of
the construction industry, decided to be proactive in helping the industry to
improve, with two major reviews and a subsequent ongoing initiative to promote
innovation in the industry.
The Latham Report
In 1993, the UK Government appointed Sir Michael Latham to undertake a review
of procurement issues in the construction industry. The Latham Report Constructing
the Team was published in July 1994.21 The theme running through this report is
that the client should be at the core of a collaborative construction process. The
report suggested that due to inefficiencies in the industry, a reduction of 30% in
the real costs of construction was possible between 1995 and 2000. This target
was met and even exceeded by some substantial clients of the construction
industry.
Rethinking Construction Report
The Latham Report did not have the widespread impact hoped for, and by 1997
there was still significant under-performance in the industry as a whole. The UK
Government set up a Construction Task Force, composed mainly of representatives
of large clients of the industry, under the Chairmanship of Sir John Egan. The
purpose of the task force was to advise the Government on ‘the opportunities to
improve the efficiency and quality of delivery of UK construction, to reinforce the
impetus for change and to make the industry more responsive to customer needs’.
Drivers for change
In their report ‘Rethinking Construction’22 (commonly referred to as the ‘Egan
Report’) the Task Force identified five key drivers for change as follows:
• Committed leadership — management belief and commitment to cultural and
operational change.
• A focus on the customer — providing precisely what the end customer needs,
when they need it and at a price that reflects the value of the product to them.
21 Sir Michael Latham,  Constructing the Team, HMSO, London.
22 Rethinking Construction – report of the Construction Task Force, Department of the Environment, Transport
and Regions HMSO, London. Report available at: http://www.rethinkingconstruction.org.
127
• Integrate the process and the team around the product — working back from
the customer’s needs and the value of the product to the customer.
• A quality driven agenda — zero defects, right first time, delivery on time and
budget, innovating and eliminating waste.
• Commitment to people — training and development, respect for all players in
the process, sustained learning and improvement and a no-blame culture.
Targets and techniques for improvement
The Egan Report set a number of performance improvement targets related to
time, cost, quality and safety in construction projects (see Table 3). Whilst these
targets seem extremely ambitious, the report said they are conservative figures,
underpinned by the performance improvements achieved by leading clients and
construction companies from the UK and USA, and knowledge of the amount of
waste in construction. The Egan Report also suggested a number of techniques
and new ways of working for improving performance, which along with partnering,
Jason Le Masurier
Indicator Improvement
per year
Current performance of leading clients and
construction companies
Capital cost
All costs excluding land
and finance
Reduce by
10%
Leading clients and their supply chains have
achieved cost reductions of between 6% and
14% per year in the last five years. Many are
now achieving an average of 10% or greater per
year.
Construction time
Time from client
approval to practical
completion
Reduce by
10%
Leading UK clients and design and build firms in
the USA are currently achieving reductions in
construction time for offices, roads, stores and
houses of 10%-15% per year.
Predictability
Number of projects
completed on time and
within budget
Increase by
20%
Many leading clients have increased predictability
by more than 20% annually in recent years, and
now regularly achieve predictability rates of 95%
or greater.
Defects
Reduction in number of
defects on handover
Reduce by
20%
There is much evidence to suggest that the goal
of  zero defects is achievable across construction
within five years. Some UK clients and US
construction firms already regularly achieve zero
defects on handover.
Accidents
Reduction in the
number of reportable
accidents
Reduce by
20%
Some leading clients and construction companies
have recently achieved reductions in reportable
accidents of 50% - 60% in two years or less, with
consequent substantial reductions in project costs.
Productivity
Increase in value
added per head
Increase by
10%
UK construction appears to be already achieving
productivity gains of 5% a year. Some of the
best UK and US projects demonstrate increases
equivalent to 10% - 15% a year.
Turnover and profits
Turnover and profits of
construction firms
Increase
by10%
The best construction firms are increasing turnover
and profits by 10% - 20% a year, and are
raising their profit margins as a proportion of
turnover well above the industry average.
Table 3: Scope for sustained improvement in the UK construction industry
(Egan Report - see footnote 22)
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New Opportunities through Culture Change
included Lean Construction, Value Management and Benchmarking. These
techniques are summarized in Box 5.
Process integration
To extend improvements throughout the industry, the Egan Report suggested
beginning by defining the integrated project process; this should bring the skills
of the whole project team together to deliver value to the client. The process
should be explicit, transparent and easily understood by all project players. This
is necessary, since efficiency is traditionally constrained by the fragmentation of a
project into separate processes. Conventional construction project processes are
linear and act as a barrier to use of the combined knowledge of all players in
design and planning. Focusing on the end product in terms of the needs of the
customer helps to establish common objectives among the whole team, and also
Box 5: Performance Improvement Techniques
(Egan Report footnote 22)
Value management is a structured method of eliminating waste from
the brief and from the design before binding commitments are made.
Value management is now used by up to a quarter of the construction
industry to deliver more effective and better quality buildings, for
example through taking unnecessary costs out of designs, ensuring
clearer understanding of the brief by all project participants and
improving team working.
Benchmarking is a management tool that can help construction firms
to understand how their performance measures up to their
competitors’ and drive improvement up to ‘world class’ standards.
Lean thinking describes the core principles underlying the Toyota
Production System and has been shown23 to apply to every type of
business activity.
It recognises that only a fraction, as little as 5%, of the total time
and effort in any organisation actually adds value to the end customer.
By clearly defining end customer value, all non-value adding waste
in the system can be targeted for removal.
The goal is to manage the value stream encompassing all processes
across all firms involved in jointly delivering the product or service.
The concept is that the product or design flows through all value-
adding steps without interruption, pulled by the demand from the
end customer. Continuous improvement is achieved by pursuing
perfection and systematically removing wasted time and effort.
23  Womack, Jones and Roos, The Machine that Changed the World, Maxwell Macmillan, Oxford, 1990.
129
leads to more integrated processes. Once the integrated process is in place, the
momentum for improved efficiency and quality must be maintained. The focus
should remain on improving value for the customer and eliminating waste.
The Egan Report says that time and effort are wasted on site trying to make
designs work in practice and recommended that design needs to be properly
integrated with construction and performance in use. To achieve this:
• suppliers and sub-contractors need to be fully involved with the design and
designers should collaborate in the manufacture and assembly;
• design should cover the whole life of the project;
• clients need to be made aware of the importance of concentrating resources
up-front to achieve this efficiency in design; and
• experience from completed projects needs to be fed back.
As a way forward the Egan Report suggested that in order to change, the industry
needs first to sort out the culture, then to define and improve processes and
finally to apply technology as a tool to support these cultural and process
improvements. To sustain the improvements, long-term relationships are needed
throughout the supply chain; this will offer co-operation and continuity to enable
the team to learn and have a stake in improving the product.
Rethinking construction initiative
In order to promote and extend the culture change throughout the industry, the
UK Government set up an initiative named ‘Rethinking Construction’24 to work
with industry to implement the recommendations given in the Egan Report. The
main themes and associated organizations within Rethinking Construction are:
• Movement for Innovation (M4I) – facilitating innovation in non-housing
construction projects and creating regional cluster groups.
• Construction Best Practice Programme — dissemination of best practice and
raising awareness of the benefits of adopting rethinking construction practices.
• Local Government Task Force — innovation in local government projects.
• Central Government Task Force — leads on best practice for government clients.
• Housing Forum — facilitating innovation in the house building supply chain.
These organizations work closely with industry to implement innovations in the
construction process. Over 400 construction projects in the UK have been
showcased as demonstration projects, by virtue of the fact that they are innovating
in one or more of the areas detailed in the Egan Report. The Tamar Bridge widening
Jason Le Masurier
24  see www.rethinkingconstruction.org
130
New Opportunities through Culture Change
project (see page 131) was an M4I demonstration project. All these projects are
subject to a rigorous peer review process, to assess the benefits derived from the
innovations. They all measure themselves against a range of key performance
indicators (KPIs), based on the targets for success given in Table 2. Analysis of
the data from the KPIs shows that demonstration projects are out-performing the
industry as a whole and many are meeting or exceeding the targets set.
The Rethinking Construction initiative has reached a point now where it is self-
sustaining. Companies involved in demonstration projects have identified this
involvement as a competitive advantage, particularly since more and more clients
when procuring projects are looking for evidence of partnering ability and may
place considerable weight on a company’s previous involvement in Rethinking
Construction initiatives.
There are some extra incentives for local government projects. All local authorities
are now required to demonstrate best value in their procurement of construction
services; the Minister of Construction of the United Kingdom has said:
“Rethinking Construction is central to the delivery of Best Value
across a wide range of local authority services. The effectiveness of
your authority in delivering Best Value for decades to come will
depend crucially on how well you manage your construction
procurement, how thoroughly you “Rethink Construction” in your
authority”.
Government has made a requirement that, by 2004, all local government projects
must be compliant with the rethinking construction philosophy. Many local
government departments have risen to the challenge and there are many examples
of partnering projects underway, for both capital works and for operational and
maintenance work. For case studies of such projects, refer to the Movement for
Innovation website at www.m4i.org.uk.
Conclusions
A key to the culture change in the industry is summed up in one word: integration.
Integration of the project processes and teams can be imposed through contractual
arrangements, such as combining design and construction, but the real gains are
made when there is a collaborative project culture. Such a culture can and does
occur under any form of contract but rather than leave it to chance, collaboration
is far more likely to occur if partnering arrangements are established from the
start of a project. For partnering to become the norm throughout an industry
requires strong leadership, in particular from clients who can influence the culture
from the start of a project. If a ‘critical mass’ is reached of clients and other
stakeholders in the industry who recognize the benefits of, and promote
collaborative relationships, an industry-wide culture change can become self-
sustaining, as is happening in the UK construction industry.
131
An NEC Partnering Case Study: Tamar
Bridge Strengthening and Widening
Tim Wood
Introduction
This paper describes the development of partnering throughout a major construction
project. The paper does not say how it should be done but is a frank commentary
from which lessons can be learned.
Background
The Tamar Bridge was opened in 1961, providing a fixed link between the major
city of Plymouth and South East Cornwall. The bridge replaced a passenger ferry
service and is, even today, the only fixed highway crossing of the River Tamar for
20 miles (32 km).
Tamar Bridge is a suspension bridge with a steel truss and concrete towers. It has
a main span of 335 m and side spans of 114 m. The road deck is 30 m above the
mean high water level and the towers are 65 m high. The bridge was constructed
with three traffic lanes, the centre ‘tidal’ lane carrying traffic in either direction
depending on traffic demand. In 1961 the Bridge was carrying 4000 vehicles a
day, and the maximum gross vehicle weight (mgvw) was 24 tons.
In 1994 the European Union (EU) issued a directive to rationalise vehicle weights
on the roads of all European member states. On 1 January 1999 vehicles of 44
tonne mgvw, and 11.5 tonne axle weight were allowed on European roads. Previous
UK limits were 38 tonnes and 10.5 tonnes respectively.
The implication of the EU directive was a major programme of bridge assessments.
Assessment of Tamar Bridge in 1994/95 found the anchorages and towers were
adequate, but the main truss would need strengthening, the main road deck
supported on the truss would need to be replaced and the main suspension
Figure 1: Tamar Bridge,
perspective
Figure 2: Tamar Bridge,
from tower top
132
New Opportunities through Culture Change
cable was only adequate for 38 tonne vehicles.
In 1996 a feasibility study for the strengthening was carried out. The preferred
solution was to add one additional traffic lane either side, providing both
strengthening to the truss and additional traffic capacity during replacement of
the main road deck, and to add supplementary cables to carry the additional
temporary weight of the cantilever lanes and the permanent vehicle loads. Other
localised strengthening would be required along with widening at all four corners
of the bridge to accommodate the new traffic lanes. During all this work the
bridge would have to be kept open to 40,000 vehicles a day!
The Tamar Bridge was built under powers of the Tamar Bridge Act 1957. The Act,
which had been promoted as a private Bill by Cornwall County Council and Plymouth
City Council, allowed the Joint Authorities to borrow money for the bridge
construction and enabled them to charge tolls to repay the loan and to pay for
future maintenance. The Tamar Bridge and Torpoint Ferry Joint Committee (TBTFJC)
was set up in 1957 to administer the Tamar Bridge and Torpoint Ferries, 2 miles
downstream of the Tamar Bridge. The TBTFJC comprises five elected Members
from each of the two Authorities. The two Authorities (Cornwall and Plymouth) act
as client on TBTFJC contracts and as joint clients on large contracts. For simplicity
in this paper the joint clients will be referred to as JC.
Legal opinion was that whilst the 1957 Act allowed the Joint Authorities to maintain
and improve the bridge it did not give them the powers to widen the bridge. The
Joint Authorities would need to deposit a new Tamar Bridge Bill in Parliament and
receive Royal Assent before it could widen the Tamar Bridge. The new Bill was
deposited in the House of Commons in November 1996.
The Joint Authorities requested funds from the UK Government for the strengthening
project but were refused because they had the ability to fund the works from toll
income. TBTFJC had reserves of £18m, a lot, but not sufficient to pay for the
works. The politicians on the TBTFJC could not support an increase in the level of
tolls and indeed a revised Toll Order would in itself take two years to be approved
by the UK Government. It was decided that tolls would be unchanged and the
project spend profile would be governed by available funds.
Procurement
Partnering
During the 1980s and early 1990s construction clients were requesting contractors
to take over normal client risks and paying enhanced prices for the benefit of a
greater certainty of out-turn cost.
To avoid the problems associated with adversarial contracts, used widely in the
UK construction industry in the 1980s and early 1990s, the project client, Cornwall
County Council, decided the way forward was to identify all the risks and manage
them. The JC would accept their share of the risks, provided that both the designer
133
and contractor were similarly committed to the same project outcomes.
In 1996 the JC had neither the powers nor the funds to enter into the contract to
strengthen the Tamar Bridge. To strengthen the Tamar Bridge at the earliest time
would mean involving the contractor at the earliest possible stage and to overlap
the normal processes of obtaining the powers, design and construction.
It was perceived that the way to achieve this was for the JC to be completely open
about their objectives and their key ‘drivers’. The JC wanted to enter into contracts
with professionals who would be just as open and co-operative, and who would
also declare their ‘drivers’. This approach was innovative because it required a
change of culture from that adopted in the construction industry at the time.
Partnering is not, however, a new concept and is nothing more than common
sense.
Selecting the designer
In 1996 the consultants who had tendered for the earlier bridge assessment,
tendered for the design of the strengthening works. The tender evaluation was
based on a 60:40 quality and price model. It was felt that accepting the lowest
price would not provide value for money. For example, the JC was seeking a
consultant with innovative ideas who would deliver a design that would ultimately
save money. Quality issues related to specific ideas for the design, risk management,
the consultant’s views on partnering, and their willingness to partner.
Hyder Consulting Ltd were selected and appointed to undertake the preliminary
design and to provide an estimate of the project construction price. Based on this
price a designer incentive scheme was established. Simply, if the out-turn price
was lower than the estimate, the consultant would receive a bonus payment; if
the out-turn price was higher than the estimate, the consultant would pay back
part of his design fee, but be guaranteed a minimum fee.
Early contractor appointment
The traditional procurement route has the design completed before a contractor
is appointed but this opens the possibility of the contractor highlighting a cheaper
method of achieving the same end result. These alternative tenders are wasteful
and ultimately the client pays for two designs, the original and the alternative, in
the project costs.
Another option is to tender a design and build contract. Again there is implicit
waste and therefore extra cost in this method. On this project Hyder already had
a detailed knowledge of the Tamar Bridge, which had been developed over two
years, and even if the same consultant were to work for the contractor, the
contractor would be taking the risk of the design, but at a price to the client.
To avoid the waste and address design risk openly, it was decided that the
contractor would be appointed at the earliest opportunity and work with the
consultant to develop the design.
Tim Wood
134
New Opportunities through Culture Change
Contractor evaluation was based on the same 60:40 quality:price model that had
worked for consultant evaluation. The price element needed to be representative
of the works. Tenderers could not price the whole of the works because the
design was only at a relatively early stage. It was decided that Hyder would
design the steel orthotropic deck, estimated to represent about forty percent of
the total construction cost, and the tenderers would price only that part of the
works.
The JC and Hyder developed questions to address the quality element of the
tender to focus the tenderers on the key aspects of the project. The questions
varied between specific ideas for erection sequences, avoiding traffic restriction,
to experience of working in a partnering environment. The tenderers were also
requested to consider taking on, or sharing, certain normal client risks. There was
not a ‘right’ answer to the apportionment of risk, but the question was directed
to solicit a clear stance on risk management from the tenderers. As with the
consultant appointment in 1996, lowest price was not the driving factor. The JC
and Hyder wanted to identify a contractor who had a similar open and co-operative
approach to the project and a willingness to learn together and to participate in
activities that contractors would not traditionally be involved with. It was more
important for the JC to have confidence in a price, than for that price being the
lowest one offered.
Tenders were issued in January 1998 and returned in March 1998. As part of the
tender evaluation all five tenderers were interviewed. The winning contractor,
Kvaerner Cleveland Bridge Ltd, was appointed in late March 1998.
The contract with Cleveland Bridge was to develop the design with the JC and
Hyder and to produce a target price for the whole project, by September 1998.
There was no guarantee of the construction contract, because the new Tamar
Bridge Bill was still going through the parliamentary process and the estimate
had to be within the TBTFJC’s budget.
The tender documents had stated that the intended construction contract would
be a modified NEC Engineering and Construction Contract, Option C (i.e. target
price contract). The detail of the contract would be negotiated once the JC had
confirmed that the TBTFJC had the
powers and funds necessary to
proceed.
Partnering workshops – forming
the team
Partnering means many things to
many people but for this team it
Figure 3: Project team
135
meant working together to achieve the project goals. It meant being open and co-
operative and thinking about the project need before the individual company
need. The team interpretation was not about throwing away contracts, contracts
form the main structure and identify risk allocation. The contracts were entered
into openly and the ‘win-win’ scenario, often referred to, would happen if each
party played their part.
In April 1998 a facilitated workshop was funded by the client and held close to
the contractor’s offices in Darlington, UK. The aim of the workshop was to introduce
everybody and to give the opportunity for the main objectives and any fears or
worries to be aired. The two day workshop was a total success, the Project Team
was now complete.
Teamwork in Design
Preliminary design
Having confirmed that the preferred design from the feasibility study was viable,
Hyder proceeded to improve the design to minimise the necessary strengthening.
The Tamar Bridge Project Team
We are all committed to:
The Project
being completed
to specified
quality, time
and target price
A fair return
for all parties
Setting a
partnering
model for
future projects
Providing high
quality and
sufficient
resources to
unified project
team
Achieving high
environmental
standards
A commercially
open book
environment
Safety being of
paramount
concern
Minimizing
disruption to
the public
Working in a
spirit of
honesty,
openess, trust
and co-
operation
The overall
parterning aims
being more
important than
the aims of the
individual
parties
A happy and
fulfilling
working
environment
Always striving
for
improvements
Respecting
the neds of
others
21 April 1998
Figure 4: Project charter
Tim Wood
136
New Opportunities through Culture Change
In striving for an economic design they requested numerous departures from
standards which were discussed with the JC, so that the reasoning was clear and
so that the JC understood the implications of accepting such departures.
Working together, the JC and Hyder were able to optimise the design. Hyder
highlighted particular areas of the design standards that were conservative, carried
out a sensitivity analysis and, with the JC, determined the benefits of a relaxation
of that standard. Often the JC would invest in additional surveys (e.g traffic flows)
or testing (e.g. actual concrete and steel properties) to substantiate and support
the departures. The openness of the working relationship made this dialogue
possible.
The JC’s willingness to invest in the project was a fundamental factor in the
success of the project.
Design development stage
Initial discussions with Cleveland Bridge highlighted that they had their own
preferred fabrication details for the steel deck design so the one part of the
project that had been designed was already going to be changed. Cleveland
Bridge’s preference would make the fabrication both quicker and cheaper.
To ensure proper project co-ordination and control, the project managers from
the JC, Hyder and Cleveland Bridge met weekly. The meetings were mostly held in
Hyder’s London office for this stage but were sometimes in Darlington or Plymouth.
Co-location was considered but the project required the part-time input from
many people rather than the constant input of a few. It was decided to work from
the parties respective offices.
Each of the three project managers co-ordinated their
respective teams to deliver the support necessary.
Additional investigations and surveys were
arranged jointly to supply information to the
team.
A key partnering factor during this stage
was the close working of Hyder’s
designers and the Cleveland Bridge
designers and estimators. The
designers worked on high value
items, high risk areas and on
programme critical items. The result
of this was to quickly close in on
the target project cost. The
Figure 5: Map of England  showing
London, Darlington and Plymouth
•
•

LONDON
Darlington
Plymouth
380 km
350 km
580 km
Tamar
Bridge
137
estimators would stop the designers when they had sufficient information to be
able to estimate the item value with reasonable (but not absolute) accuracy. This
approach was unfamiliar to most and was an early test of working together.
Design is an iterative process and sometimes there were more iterations than the
contractor had patience for, but this was necessary for the consultant to be
confident with his design overall. The team learnt to better appreciate the pressures
on each other and certainly developed a greater understanding of the whole
project development process. Having such a large influence on the project at this
stage, Cleveland Bridge was able to make a real difference and also understand
the frustrations of design limitations and of the democratic consultative process.
The JC had key project aims and an additional ‘wish list’. Items from the wish list
would be included if the target price could accommodate them and stay within
the budget.
Integrating design and construction
The JC did not have the safety net of a design completed before the construction
started, so rather than the conventional situation, where the consultant has only
design liability, Hyder were here also obligated to deliver particular parts of the
design to meet a series of dates, to avoid the site works being delayed. Rather
than imposing these dates on Hyder they were agreed within the team, recognising
the resource needs of all parties. Hyder had been instrumental in developing the
procurement process, so were fully aware of this aspect of the project. This was
one way the project was able to be fast tracked and was a benefit derived from
the partnering culture.
The supply chain
It was decided at the first partnering workshop that only the main parties would
be involved in the formal partnering workshops. The thinking behind this was
that the partners all needed to know the full scope of the project and the full
range of project issues. After the civils contractor (Kvaerner Construction), the
next largest contribution would be from the painting contractor, with an equivalent
contract value of about £1m, and it was felt that the same level of project
commitment and sharing of problems could be achieved by a simpler solution.
There were numerous key suppliers/contractors whose input was invaluable to
the project. The key to developing the necessary commitment to the project was
to be totally open about the project goals and the restrictions. When seeking
contractors we used the team’s knowledge and experience to create a shortlist.
The suppliers were then asked for their prices for the item of work, but also asked
for any other added value they could bring to the project. This approach is not
unusual in the industry, but it usually happens in the background. The team’s
open approach demanded ‘all cards on the table’. The team was rewarded by
some excellent suppliers/contractors who operated in the same fashion as the
main team.
Tim Wood
138
New Opportunities through Culture Change
The cable stay supplier (Bridon Structural Systems) offered extensive design
experience for the same price offered by their competitor for simple manufacture
and supply. This additional design support was to Bridon’s advantage, because
they could specify a cable that they knew from experience would achieve the
necessary breaking load, but with a small margin, and the team could redirect its
own designers to other elements of the work.
This avoidance of duplication was a primary objective of the approach, removing
waste in the process. The contract with Bridon was extended to include several
items relating to the erection of the cables, working with Cleveland Bridge’s
temporary works designers.
Not only were there financial and time benefits to the project from this closer
working relationship but also safety benefits. At times the team was too focused
and could miss the obvious. Each new supplier added a new point of view from
which the project benefited. For example, stressing of the stay cables was originally
designed to be done at the top of the towers, 65 metres above mean high water
level, but this was highlighted by the cable suppliers and sensibly the cable
system was re-designed to be stressed from the relative safety of road level,
making erection, and future maintenance, safer and quicker. This type of saving
can not be easily quantified.
Another example of key partnering input was from the Independent Design Checkers,
Mouchel Consulting with Leonhardt, Andr and Partner. It would be normal to
complete the design then have it checked, but the team could not do this; to
match the progress of the design development the check needed to be done in
stages. It was also necessary to re-check some areas of the design which changed
due to the design iterations. To maintain their independence Mouchel were not
part of the Project Team. However, their contribution was significant and provided
a mandatory and essential level of scrutiny.
It has been suggested that this second level of consultants is wasteful, but when
dealing with public safety the insurance of a second, independent, opinion is
essential.
Programme issues
Dealing with delays
Before September 1998, when the target price was to be submitted, it was clear
that it would not be possible to start construction until March 1999. Detailed
planning permission would be given in January at the earliest and approval to
proceed would need to be confirmed by the Councils, which could not be given
until 23 March 1999.
The forecast three-month delay to the start of construction was used to maximum
benefit. The works contract was to have been negotiated before September 1998,
139
but it was decided instead to concentrate on the design and get more certainty
with the target price. It was agreed that after the target price had been submitted,
detailed design would continue straight on. At the same time the JC and Cleveland
Bridge would negotiate the contract, and the team would prepare for a construction
start in March 1999.
Placing advance contracts
The cable stays were needed early in the construction programme, but the lead
time was such that a contract would have to be placed with the suppliers (Bridon)
before it was known whether the scheme could go ahead. Cleveland Bridge was,
quite reasonably, not able to take this risk, so the JC took the risk and guaranteed
recovery of the cable supply cost if the project did not proceed. Cleveland Bridge
placed the contract with Bridon to secure the delivery dates and avoid programme
delays. This demonstrates how the JC’s willingness to invest in the project was
essential to its success.
NEC contract
At tender in January 1998, the JC had stated that the contract would be based on
the NEC Engineering and Construction Contract, Option C (target price with activity
schedule). Certain secondary options had been decided upon, like the need for
retention. Importantly, issues like setting liquidated damages and advanced
payments were left for future negotiation. It was clear that modifications would
be needed to the standard contract, for example the design would be delivered
gradually, not all at construction start.
The focus of managing risks, building in value and avoiding waste were as important
here as in the design process. At tender, Cleveland Bridge had offered to adopt or
share certain risks with the JC. These were built into the contract.
The NEC contract was chosen because it best reflected the spirit in which the
client wanted the contract to run, i.e. “The Employer, the Contractor, the Project
Manager and the Supervisor shall act as stated in this contract and in a spirit of
mutual trust and co-operation” (Clause 10).
Other reasons for choosing the NEC were as follows:
• Programme — rather than keep reflecting on an original programme the NEC
requires the programme to be updated monthly by the Contractor. This gives a
much better appreciation of progress and programme and the possible
implications of changes.
• Incentive scheme — Option C includes an incentive scheme. The client wanted
the contractor to share in any savings or overspend to develop the common
goals and commitment in the project.
• Problem solving and compensation — NEC focuses on resolving the problems.
Tim Wood
140
New Opportunities through Culture Change
The procedure of Early Warning Meetings (EWM) serves to bring all parties
together to solve the inevitable problems that arise and to move on. The process
of EWMs followed by compensation event notifications and, if appropriate,
compensation event quotations, is clear and aids effective project management.
There were approximately 180 compensation event notifications during the Tamar
Bridge project. This number was not considered to be any more or less than could
have been expected had the contract been administered under any other form of
contract.
Risk sharing
The client’s risks are clearly defined by the compensation events and, by inference,
the contractor’s risks are those that are not the client’s. The openness of monitoring
costs and applying a contractor’s fee is refreshing and ensures that the Project
Manager has a better understanding of the construction costs.
Facility to amend or add clauses
The JC did not want to make too many modifications to the contract. The main
changes that were made are as follows:
• Introduction of an additional three-stage issue resolution procedure. This had
to be used before any issue could be referred to adjudication.
• Introduction of a ‘Suicides’ compensation event. Measured similar to weather, it
reflected the disruption caused by attempted suicides from the structure and
made the Contractor aware of the risk.
• Amendment to the payments clause. The JC had reserves of about £20m (in
1998), so to avoid paying the Contractor in arrears and the project incurring
financing costs, it was decided to make an advance payment. The advance
payment primed the construction start, but there were other periods through
the contract where cash flow was forecast to be difficult. It was agreed that the
JC would, at each assessment, pay the last month’s costs (as usual in Option C)
plus the forecast personnel cost and cost of invoices that would become due
for payment before the next assessment date. This agreement allowed the
construction contract to run almost ‘cash neutral’ avoiding unnecessary financing
costs.
The lawyers, brought in to help at this stage, were encouraged by the openness
of the partnership and were pleasantly surprised to be involved at the drafting
stage rather than at the adjudication stage!
Contract Signing
Final approval to proceed was given by Cornwall County Council and Plymouth
City Council on 23 March 1999. The contracts were signed and the construction
contract started the same day.
141
Construction Stage
Integrated team
The Project Team had developed excellent working
relationships over the previous twelve months
(March 1998 to March 1999). Working together to
solve problems was normal operation. The way
to build on this was to share all site facilities;
there was one Project office, a combined commercial
team, one computer network and the administration
staff supported the team.
Public relations
It was important that the Tamar Bridge Project Team had an image and a single
point of contact for the public and the media. A logo was created which everybody
could identify with and a full time press/customer relations officer was appointed
(as a resource of, and a cost to, the Project).
The team wanted to promote the project, to make the public and bridge users
aware of what was being done, to aid understanding and to mitigate any frustrations
about traffic delays or disruption to their normal way of life. The team issued a
quarterly newsletter, held bi-monthly residents meetings and gave presentations
to local interest groups and professional institution meetings. A visitor centre was
set up in the project office where groups from schools, societies, and clubs were
given talks. Staff from all parties shared the workload. The team always maintained
that no matter whom you ask in the team, the response would be the same,
whatever the subject. This was certainly true for the public relations issues, but
obviously we would draw on each party’s specialist experience for technical
presentations.
Enlarging the team
As mentioned above, the NEC family of contracts embodied what the Project
Team was about, that is a fundamental obligation on all parties to operate with a
spirit of mutual trust and co-operation.
The challenge was how to impart the
partnering culture to the enlarged team
required for construction.
Many projects have succeeded regardless
of the contract form adopted; one of the
common factors for success is good
people relationships.
The first and most important way of
engendering the partnering culture
through the larger team at Tamar was toFigure 7: Project office
Figure 6: Team logo
Tim Wood
142
New Opportunities through Culture Change
lead by example. The project managers from the lead parties worked closely and
as one. The skilled workforce took pride in their work and, like anybody, wanted
to do the job only once. The team emphasised the need for clerk of works/
inspectors and charge-hands to work with the workforce, maintaining a dialogue,
and avoiding defects rather than waiting to list them. This was stating the obvious
for most people, but an essential part of the success formula. It was believed to
be important that everybody involved on the project knew that their input was
valued and important to the outcome of the project.
A financial incentive scheme was introduced, offering a bonus of 10%, up to
£500, of whatever saving was realised from a suggestion. The scheme was another
way of getting people to think about delivering the project cheaper and faster.
Impact of staff changes on the project team
There were a number of staff changes during the construction stage due to changes
in the individual organisations: Cleveland Bridge underwent a management buy
out in late 1999; In mid 2000 staff were promoted within the JC; and in early 2001
Hyder Consulting was acquired by a management buy-out.
The effect of these changes individually was not significant, but progressively the
team began to lose its partnering ethos. The trust and co-operation that had
been developed between the project managers and Directors was being lost by
the gradual replacement of key team members. However, the close working
relationships that had been developed on site were strong and made a huge
contribution to keeping the team together and reinforcing “the needs of the
Project being more important than the needs of the individual parties” (one of
the original edicts of the partnering charter).
In February 2001, a third partnering workshop was convened to refocus all the
team’s efforts to the common goal of completing the Tamar Bridge Project as
quickly as possible. Relationships did not
instantaneously improve, but an action plan was
agreed to recover the programme and resolve
outstanding issues. With all issues aired the trust
and openness re-emerged over the coming
months.
The Outcome
Contractual completion was achieved on 20
December 2001, six weeks late after thirty one
months. The project out-turn cost was only 10%
higher than the original budget.
Figure 8: Construction progress, cantilever
progress from tower top
143
Strengthening and widening an existing suspension bridge is a complex operation
and one which could have been subject to large cost and time over-runs. The
team approach worked at Tamar Bridge.
The strength of the Tamar partnering was not that everybody was happy all of the
time, but that strong professional and personal relationships had been established
which allowed difficult topics to be discussed and resolved. The trusting, open
approach has stood the team in good stead throughout the project, albeit tested
to its extremes at times.
Figure 9: The completed project
Tim Wood
144
New Opportunities through Culture Change
145
A Project Charter
[Name of Project]
The Parties involved: ..........................................  [Owner/Employer]
..........................................  [Contractors]
..........................................  [Engineer/ Architect]
do hereby commit to the following core values:
•  Effective management, resourcing and communication
•  Respect for the environment and the public
•  Mutual trust, respect and integrity
•  Effective listening and discussion
and our Mutual Goals are:
•  Achievement of budgets, thereby delivering reasonable returns
•  Timely resolution of issues at all levels
•  A high standard of quality and safety
•  Job satisfaction for the whole team
•  On time completion
Accordingly, we are committed to the following mission statement:
We will work together with openness and integrity, committed to effective
teamwork and co-operation to make this a successful project.
  Signed on behalf of [the Owner/Employer]: ..........................................
  Signed on behalf of [the Contractors]: ..........................................
  Signed on behalf of [the Engineer/ Architect]: ..........................................
  Place:................................. Date: .................................
Examples of Partnering Agreements
Nael G Bunni
In its simplest form, a partnering agreement can consist of a one-page
statement of core values and mutual goals.
146
Examples of Partnering Agreements
147
A Project Charter
[Name of Project]
Table of Contents
1 Project Partnering Charter
2 List of Participants
3 Identification of the Objectives
4 Issue Resolution Ladder
5 Resolving Problems and Developing Action Plans
6 Partnering Follow Up
  6.1  Partnering Leaders
  6.2  Partnering Performance Evaluation
7 Results of the Partnering Workshop Evaluation
A more complex project may require a more detailed agreement, with special
forms that will assist the partnering activity.
Nael G Bunni
148
Examples of Partnering Agreements
1: Project Partnering Charter
[Name of Project]
The Parties involved: ..........................................  [Owner/Employer]
..........................................  [Contractors]
..........................................  [Engineer/ Architect]
Date: ................................
We do hereby commit to work together
1.1 We commit to work together in a professional and collegial manner to
provide .................... that is recognised for its distinct quality, prestige and
functionality.
We further commit to deliver this facility in a cost-effective and timely
manner while achieving the highest standards of workmanship and ensuring
that each individual contribution will be proud to have been associated
with this project.
Consequently, we will assist each other with all the knowledge and skills at
our disposal to provide and maintain an open forum for the prompt
identification, discussion and timely resolution of any problem which may
arise on our Project.
1.2 We shall do this with enthusiasm through cooperation, ingenuity, and
integrity.
Mutual Trust, respect, dedication, open-mindedness and honesty shall be
the medium in which all members of the Project team will be working.
Signed on behalf of:
1 ........................................................................
2 ........................................................................
3 ........................................................................
4 ........................................................................
5 ........................................................................
149
2: List of Participants
Name Title Phone No. Fax No. e-mail
1
2
3
1
2
3
1
2
3
1
2
1
1
1
2
1
2
1
2
Contractors
Sub-contractor No 1
Sub-contractor No 2
Supplier No 1
Supplier No 2
Consultants No 1
Consultants No 2
Senior Employees
Owner/Employer
Nael G Bunni
150
Examples of Partnering Agreements
3: Identification of the Objectives
Owner/Employer and Consultants
Within the context of the applicable law codes, culture and public policy, and
also in accordance with the provisions of the contract:
No.
1 Scope:
2 Schedule:
3 Cost:
4 Quality:
5 Future Relationships:
Contractors & Sub-contractors
1
2
3
4
5
6
7
8
9
1.1.1.1.1
1.1.1.1.2 Satisfaction of the Client
1.1.1.1.3 Time
1.1.1.1.4 Quality
1.1.1.1.5 Fair Compensation
1.1.1.1.6 Satisfaction of the parties
1.1.1.1.7 Avoiding conflict
1.1.1.1.8 Exposure and implementation to the Canadian methods
1.1.1.1.9 Prestige to be involved in this work
1.1.1.1.10 Potential economic spin-off from participation in the project
151
4: Issue Resolution Ladder
Reaction
Time
Client/
Owner
Consultants Main
Contractor
Ditto
....
Sub-
contractors
Others
1.2.1.1.11
1.2.1.1.11
1 hour
24 hours1.2.1.1.12
1.2.1.1.12
24 hours1.2.1.1.13
1.2.1.1.13
Nael G Bunni
152
Examples of Partnering Agreements
5: Resolving Problems and Developing Action Plans
As required
under the
Contract
Periodic
updates
• Identify problems
• Establish responsibilities
• Establish target dates
Category:
Communication
By date as
agreed
• Develop clear
implementation schedule
to enable all to plan their
resource allocations and
compensation
requirements accordingly.
4  Communication problem:
Language. Is there a
language problem on site?
5 Provide appropriate
periods for the process of
approval and review).
This period can be
doubled if there is a
rejection either by the
consultant or by the client
To identify very early items
that have a potential to be
rejected (equivalents) and to
apply for acceptance for the
equipment before the
presentation of the shop
drawings.
Before the
presentation of
shop drawings
By sub-
contractors
Minimum of
one day
By all parties
involved
Written message asking for
an appointment for verbal
communication.
7 People are not talking to
each other
Parties
involved in a
problem
All parties involved in a
certain problem should
meet, talk openly and
reach a decision before
the meeting is over.
Immediately
after the
problem is
identified
Problem
Category:
Administration
1  Permits
2  Procrastination/delay
6 Communication problem:
     Distance and Time.
• Initiate action according
to contractual provisions
to resolve overhead costs
that have not, to date,
been compensated for.
What to do By whom? When?
Resolve as appropriate As required. 2.2.1.1.13.1.1
Daily
All personnel
Action Plan
What to do By whom? When?
Obtain required permits As required
Weekly meetings; All personnel
3  Ensure that all parties are
fairly compensated for
costs relating to resources
and time
153
Category:
Quality
What to do By whom? When?
13. Very high standards:
• Quality
How will it be
monitored & maintained
• Proper verification
• Supervision of execution
2.2.1.1.13.1.3
Contractors
and
Consultants
Full time
supervision of
work in
progress
•
14. Time Crashing vs Quality
of work
• not
sacrificed for time
• Appropriate resources
are required
• Proper supervision &
testing
2.2.1.1.13.1.4
All parties
All parties
As required
according to
schedule
Quality will  be
15. • Submittal of quality
control plan
• Review of quality control
plan
• Proper testing methods
• Proper reporting
methods
2.2.1.1.13.1.5
All concerned
2 weeks
before starting
work
and
periodically
Perceived non-compliance
with quality assurance and
quality control procedures
Category:
1.2.1.1.13.1.1.1  Design
8.
• Define scope of work
• On site problems/site
conditions
• Shop drawings and
submittals
What to do
• Define scope of work of
different subcontractors
mainly electrical and
mechanical sub-
contractors
• Site conditions to be
brought up for attention
• Programme for shop
drawings to be
discussed
By whom?
Client
Contractors
All concerned
When?
Prior to
preparation of
shop drawings
In a timely
manner
To comply with
requirement
schedule
Category:
Health & Safety
What to do By whom? When?
9.  Identify hazards and Risks 2.2.1.1.13.1.1.2
All to discuss
All concerned At commence-
ment and
periodically
Category:
Environment
What to do By whom? When?
10. Work area  restrictions • Deliveries to the site?
Storage of materials?
11. Traffic permit Contacts with the traffic
dept, to ensure obtaining a
permit & constant follow up
for its renewal
12. Neighbour’s complaints Major works that generate
too much noise might need
to be specifically planned.
•
By
subcontractor
2.2.1.1.13.1.2
When needed
By Main
Contractors
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154
Examples of Partnering Agreements
Category:
Programme
What to do By whom? When?
16.  Approval of shop
drawings and various
contractors’ submittals
• Drawing submittal to be
in an orderly fashion
• Review of shop
drawings
All concerned 2.2.1.1.13.1.6
As per
schedule,
either in
contract or to
be agreed
Category:
Resources
What to do By whom? When?
17.   Specific problems to be
discussed
• ??? Contractor
and sub-
contractor
2.2.1.1.13.1.7
Immediately
155
6: Follow-up Plan
6.1 Team Leaders:
Indicate names and communication numbers
6.2 Partnering Performance Evaluation:
1 Communication
2 Team spirit
3 Respect for deadlines
4 Availability of Resources
5 Availability of Information
6 Clarity, coherence and precision of documents
7 Quality of work
8 Meetings’ efficiency and effectiveness
9 Participants’ actions with respect to requests for changes
Name: Date:
7: Results of the Partnering Evaluation
8: Recommendations as a result of the Partnering Evaluation
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Examples of Partnering Agreements
157
9 Preventing and Resolving Disputes:the Role of  the Neutral
Gay Pavelka, Ernesto Henriod & Frank McDonough
Abstract
The two papers presented in this Chapter deal with the crucial role of the Neutral in
modern contract drafting and project management.  In the first paper, Gay Pavelka gives us
a brief, but thought-provoking examination of the spiral of conflict, and the salutary role
that a Facilitator can play in defusing the animosity that frequently surrounds the development
of a dispute, and its escalation to impasses that have to be resolved by adjudication or
court ruling.  Whether specified in the contract or not, the facilitator can be appointed at
any time during the execution of a project to improve inter-personal relationships in a
contract, leading to the resolution of a particular dispute, or to longer-term measures for
enhancing the effectiveness of project management, such as the introduction of partnering
(as was the case in the World Bank headquarters construction project – see the case
presentation at the end of the Pavelka Paper.)
In the second paper, Ernesto Henriod and Frank McDonough discuss neutrals as part of the
contract, either as an ad-hoc resource for the resolution of a problem that is becoming, or
has developed into a dispute (e.g. the ‘expert’ in Section 13 of NSZ3910, discussed in
Chapter 7), or as a person or panel whose participation in the project from its outset is
provided for in the contract: for instance, the Dispute Resolution Boards of the USA, or the
Dispute Adjudication Boards in the FIDIC conditions of contract. When appointed to follow
the evolution of the project from the beginning, the neutral’s principal role is that of a
dispute prevention resource.
158
Role of the Neutral
159
Facilitated Discussions — Preventing
the Conflict Spiral
Gay Pavelka
Introduction: The Conflict Spiral
Problems are always emerging in any activity involving inter-personal relationships.
Many are resolved as they emerge, but some problems escalate into a conflict
that often seems well beyond the seriousness of the issues. This spiral of conflict
is well illustrated in Figure 1, by Carpenter and  Kennedy.1
Avoiding this kind of tiring, relationship-damaging, and  destructive conflict is an
obvious goal for all involved in the management of contracts. A process that will
assist in achieving this objective must be strong enough to overcome the fact
that not many of us like problems, and people tend to avoid admitting they have
arisen. The resulting pattern is usually one of avoidance, no attempt at resolution,
and escalation. Facilitated discussions can prevent disputes developing. Mediation,
once a dispute has developed, can assist in building an agreement on how future
conflict will be managed before it escalates to a stage that requires the intervention
of an arbitrator or the courts of justice.
A facilitator, as does a mediator, provides a neutral, skilled approach that supports
parties to negotiate their own agreements. The contract may be the focus of
discussions but facilitated discussions can be applied to a wide variety of project
issues.
Enter the Neutral: Facilitated Discussions
Facilitated discussions are managed in a range of ways to suit the uniqueness of
each case.  However, there are fairly well defined steps which the parties can
anticipate in facilitated discussions.  They include:
• Selecting and engaging the facilitator;
• Information gathering from all parties;
• Confirmation of the issues to be understood and resolved;
• Educating each other about points of view, separating out facts and assumptions
to establish an agreed set of information;
• Agreeing on criteria to assess options;
• Identifying a range of options;
• Evaluating options;
1 Susan L Carpenter and W J D  Kennedy, Managing Public Disputes, 1988 (page 12)
160
Role of the Neutral
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161
• Decision-making; and
• Reviewing the agreement and implementation progress.
A necessary pre-requisite is that the parties agree to engage a facilitator, and
participate in the process which is outlined above, in a spirit of goodwill.  A
‘facilitation’ process is not imposed on the parties — they must agree to become
involved and contribute to its outcome. Needless to say, the degree of response
the facilitator can elicit from the parties will depend on his or her experience, and
the respect and trust in which the person is held by the parties. Thus, the success
of this approach depends, to a large extent, on two factors: first, the willingness
of the parties, and second, the selection of  an appropriate facilitator.
The Strengths of Facilitated Discussions
Facilitated discussions include the following strengths, which are listed without
regard to any order of priority:
• By being responsible for the content and outcome of the discussions, the parties
learn that they have the ability to manage their differences, and need not be
dependent on others for solutions.
• A chance to ventilate frustration and other emotions in a private meeting,
moderated by the facilitator, means that strong feelings can be aired without
further damaging relationships among the parties.
• The parties can define what they need to discuss. The topics often extend
beyond legal issues related to a contract.
• The tone and manner of  talking, the ways of asking questions and expressing
alternative views of the ‘situation’ offered by the facilitator can help the parties
see their situation differently.
• The parties are free to concentrate on the substantive issues and on achieving
a working relationship, while the facilitator steers the process.
• Negative language, which is often present as the problems develop, and frequently
becomes a block to progress, is re-framed in the process into constructive,
problem-solving language by the facilitator. ‘Re-framed’ language promotes a
joint ownership of the issues by presenting constructive statements of what
needs to be understood or resolved. A mutual gain approach is promoted.
• By understanding the parties’ needs and goals, a facilitator can ensure the
discussion focuses on satisfying the parties’ interests, and avoids competitive
arguing for favoured solutions or positions.
• The risk of settling on the first solution suggested and failing to seek other
creative solutions can be overcome by facilitated problem-solving that aims to
create a choice of solutions.  Premature decision-making is also prevented so
Gay Pavelka
162
Role of the Neutral
that the consequences of adopting the various options are fully understood
before reaching commitment.
• ‘Fresh eyes’ can see a situation differently.  Specialist knowledge of a topic and
familiarity with information or a situation predisposes us to see and sense
aspects particular to our area of knowledge.   For example, a city person walking
in the bush may notice the density and size of the trees; a hunter may notice
signs of deer disturbing the forest floor, and a botanist may concentrate on the
flowering plants present.  A facilitator working outside of the framework of the
parties’ prior experience can observe more creatively, and can help all the
parties build a complete picture of the situation.
• The risk that sometimes comes with an unpredictable imposed solution through
litigation can be replaced by facilitating a mutually satisfying practical solution.
The parties keep control of the outcome, knowing adjudication remains a
backstop.
• When new information is needed, the parties can jointly agree on:
— who will provide the information,
— what methodology will be used,
— any interpretation issues to be identified, and
— when the information will be required.
The data thus gathered is commonly owned, rather than the alternative of
having expert information that becomes a ‘bullet in the gun’ for each party to
use against the other.
• Some agreements can be trialed and reviewed to encourage commitment and
to check that the most workable answers are found.
The Limitations of Facilitated Discussions
Facilitated discussions do have these limitations:
• There is a financial cost, and time commitment, without the guarantee of an
agreement. This is particularly a problem if there is very limited time available
to resolve an issue, and the consequences on not reaching an agreement are
serious.
• The willingness of the parties to listen to each other, and the motivation to
actively participate in the joint discussions is essential.
In summary, facilitated discussions provide the flexibility to satisfy a wide range
of situations through a low-risk process.  The approach recognises the importance
of protecting working relationships so that people are able to deal with each
163
other with confidence in the future.  It is a well-tried tool for preventing the spiral
of conflict.
An example of the work of facilitators: The World Bank new Headquarters
Building2
The World Bank headquarters offices are located in central Washington D.C., one
city block away from the White House complex.  Since the formation of the Bank
after the Second World War, the premises had been growing within the same
block, first, by gradual acquisition of existing buildings that were later joined with
bridges and tunnels, and later by developing new buildings as land was bought
within the same block (the ‘Main Complex’) and adjacent streets (for further
outlying buildings).
In the late 1980s, the Main Complex consisted of four pre-war buildings, and two
newer ones.  These buildings had severe functional shortcomings including,
particularly, the almost impossibility of installing the communications lines necessary
for modern networking.  Physical communications were also difficult, and staff
spent much time in the twisting corridors of a group of buildings that had developed
without a master plan. Offices were dark and poorly laid out, and there was
plentiful asbestos in ceilings, pipe lagging and other parts of the structures requiring
heat or fire protection.  The Bank’s Board decided to redevelop the whole area of
the Main Complex.
After an international architectural competition, the winning design was developed,
and a contract signed in 1989 with a local construction company to build or
refurbish the 2.2 million square feet Main Complex.  The contract consisted of the
gradual demolition of the four older buildings, staged construction of the new
building, and gradual gutting and refurbishment of the remaining two post-war
buildings.  Work on excavation and construction of the first stage new building
would start with only conceptual architectural drawings, no detailed services
drawings, and only the detailed structural designs.  The structure of the new
buildings would consist of reinforced concrete columns and post-stressed beams
and floor slabs.
In other words, this was to be a fast-track project, starting with basic essentials,
and only conceptual ideas of what would follow.  Several problems arose from
the decision to go ahead in this fashion: first, in the absence of final designs of
a very complex set of buildings, the total cost of the project and the time needed
for construction were grossly underestimated; second, the architectural details
had to be fitted into structures constructed before those designs were finished;
and new penetrations worked out for a large part of the building services.  The
final design of the services (water, sewerage, drainage, power, heating, ventilation
and air conditioning, and communications) required penetrations in places not
2 Note by Ernesto Henriod, who was responsible for the project from 1994 to 1998, as Director of the Headquar-
ters Construction Department.
Gay Pavelka
164
Role of the Neutral
foreseen initially, with the added complication that the floor slabs had been built
in post-stressed concrete.
By 1993, it was clear that the cost, originally estimated under US$200 million,
would exceed US$300 million.  Over 5,000 “change orders” (variations) had
accumulated and were unresolved, as the parties were unable to negotiate
reasonably and constructively.  The head contractors were preparing a claim,
valued at about US$12.5 million.
After an investigation, the Bank’s Board decided on a change of project
management.  A Headquarters Construction Department (HQC) was established to
replace the previous ad-hoc administration, with its Director reporting to the
Bank’s President.  As one of the first steps of the new HQC, the project estimate
was recalculated more realistically at US$327 million, a figure which the Board
approved, albeit reluctantly. HQC also appointed firms specialising in construction
law, and project scheduling and management, to provide assistance.
The heads of the three main contracting parties (client, architect and head
contractor) met, and agreed to appoint new managers, fresh to the project and
free from the previously escalating animosities.  A further key development was
the agreement by all parties to bring in a facilitator  to help improve channels of
communication and help resolve the problems and  areas of impasse.  Several
sessions were held with the facilitator assisting the parties in their discussions to
identify the ‘stones on the road’, and agree on means for better communications
and working relationships.  Perhaps the most important outcome of the facilitated
discussions was the decision to establish a partnering agreement, with a structured
plan for the discussion and resolution of problems (a ‘reverse cascade’, starting
at site level and escalating gradually to senior management if the problem was
not resolved) and a Charter to guide all concerned with the project towards
successful completion.
The first positive outcome of the new arrangements was the resolution of the
US$12.5 million claim for a fraction of that amount, and the negotiation and
settlement of the over 5,000 variations.  The performance of all concerned improved
considerably, and so did personal relationships, resolving problems — often very
complex — as they were identified on site.  The whole project was completed in
1998, with a final cost of US$320 million, and leaving no disputes unresolved.
The same facilitator had paid sporadic visits to the project, meeting all parties in
friendly sessions, and assisting in maintaining the momentum of the positive
environment he had helped create.
As a footnote, the introduction of partnering after a project has gone sour has
been a frequent practice in the USA, and has been described by Miles and Ballard3
as a “programmatic Band-Aid”.  This approach to partnering is therefore a cure for
3 Robert Miles and Glenn Ballard, Contracting for Lean performance: Contracts and the Lean Construction Team,
1997.
165
a sick patient, rather than a tool for prevention of contract sickness, when partnering
or a DRB/DAB are introduced at the beginning of contract execution (see also
Chapter 8 and the following paper by Hernriod and McDonough).
Gay Pavelka
166
Role of the Neutral
167
The Neutral as Part of the Contract
Ernesto Henriod and Frank McDonough
Introduction
In previous chapters we have reviewed the change that has been taking place in
the management of construction contracts, away from adversarial confrontation,
and towards a collaborative approach; we have also discussed the new forms of
contract that are emerging, in the world and in New Zealand. The changing culture,
the advent of partnering, and the introduction of neutrals and adjudication in the
newer forms of contract, are all part of the drive towards achieving greater efficiency
in the construction industry, reducing the expenditure and waste created by the
culture of claim, confrontation and litigation.
One of the most successful approaches at removing the spectre of unresolved
disputes in contracts has been the introduction of the Disputes Review Boards1,
pioneered on the West Coast of the USA, and now enshrined in the World Bank
Standard Bidding Documents (SBDs), the Asian Development Bank Sample Bidding
Documents, and the FIDIC Conditions of Contract (the last two show them under
a slightly different name, Dispute Adjudication Boards). The NEC includes a neutral
— the Adjudicator — available to resolve disputes as they arise. An important
feature of the Boards and the Adjudicator is that they are preferably appointed in
the Contract, and should be available from the start of contract execution.
By contrast, NZS3910, in its present form, includes the good offices of an expert,
appointed only after the dispute has arisen, to provide “a recommendation to
assist in resolving the matter”. On a par with any neutral contribution based on
a non-binding recommendation, the real worth of this approach hinges entirely
upon the respect commanded by the expert among the parties, and the extent to
which the parties will accept his or her professional judgement. If challenged, the
recommendation is ineffectual, as the parties may then proceed, in two further
steps, to mediation and arbitration. All these steps are assisted by neutrals brought
in after the problem has occurred and threatens to escalate, or has spiralled into
a dispute. By definition, these neutrals come to the project after it has started,
and have to be brought up to date with the details of project development and
the background of each dispute. Their contribution to the project is therefore
limited to the resolution of one or more specific disputes, with little effect on
prevention, a more desirable and less costly approach.
A further discussion of the provisions for dispute resolution in NZS3910 is given
in Chapter 7. This paper will refer mostly to the neutrals appointed in the contract,
who follow its development and assist as problems arise — DRBs and DABs: in
short, functional contract neutrals.
1 The name is expected to change to ‘Dispute Resolution Boards’. This change is currently subject to confirma-
tion by the membership of the DRB Foundation, and it would better fulfil the DRBF bylaws, which describe a
DRB as a “means for prevention and resolution of construction disputes.”
168
Role of the Neutral
The Disputes Review Boards (DRBs)
One of the first recorded attempts at forming a DRB was a successful advisory
board of four members which helped bring the dispute-troubled Boundary Dam
project in Washington State, USA to a successful and litigation-free conclusion, in
the mid-1960s.2 This was followed by a report on Better Contracting for Underground
Construction commissioned by the US National Committee on Tunnelling Technology,
which was highly critical of the frequency of claims, disputes and litigation affecting
construction projects, and raised awareness as to the need to develop a better
approach to dispute prevention.
The formal concept of Disputes Review Boards did not arise until the early 1970s;
the first major contract employing a DRB was the second bore of the Eisenhower
Tunnel, in Colorado. Following a dispute-plagued first stage, the second bore
proceeded smoothly with the assistance of a DRB. The basic concept of the DRB,
as a board of three highly experienced members who would keep track of project
construction, and provide non-binding recommendations for the resolution of
problems, was established at that time. The procedures for the operation of the
DRB were yet to be formalised industry-wide, and were developed by the Eisenhower
Tunnel panel as the project was constructed.
In 1980, a World Bank-financed project in Honduras, the El Cajon Dam (Latin
America’s highest concrete arch dam), was the first project outside the USA to use
DRBs. Since then, use of DRBs has extended rapidly: by 2001, 818 projects world-
wide, with a total contract value of US$41.0 billion had used DRBs.  The projects
ranged from an Art Museum and a City Hall, to hydro-electric and highways projects.
In the 818 building and civil construction contracts supported by DRBs, 1021
disputes had been settled, and only 31 of the disputes had been taken beyond
the DRB process.3 Close to one half of those thirty-one disputes referred to one
problem project, in which the DRB did not operate as required by the generally
accepted principles of absolute impartiality.
It is important to note that DRBs main role is that of dispute prevention — first, by
their regular presence at the site of works and their availability to defuse problems
as they arise, given the experience of the DRB members and their current knowledge
of site development. And second, the personal experience and prestige of the DRB
members, and the method of their selection, make it difficult for the parties to
challenge the recommendations they issue: they thus become a deterrent to
escalating a problem into a dispute to be subjected to arbitration or litigation.
The gains in overall efficiency and savings brought about by having a DRB in the
contract are highlighted by their relatively very low cost — vis-à-vis the costs of
unresolved disputes, arbitration and litigation. According to Chapman4, “The costs
2 R M Matyas, A A Mathews, R J Smith and P E Sperry, Construction Dispute Review Board Manual, McGraw Hill,
1996.
3 Dispute Review Board Foundation, Forum, Volume 6, Issue 1, January 2002.
4 Peter H J Chapman: “Worldwide Application of the DRB Method of Dispute Resolution”. Paper presented at a
World Bank Seminar on Ten Years of DRB Success at China’s Ertan Dam, Washington DC, 2001.
169
of setting up and running a dispute board have been estimated between 0.05%
and 0.3% of the project cost — the proportion being less the higher the value of
the project.” In contrast, Chapman states that: “Arbitration can take months or
years. 50% of legal cost in construction is dispute related, and 10% of projects
spend 10% of project cost in legal fees.” In such extreme cases, legal fees could
amount to 5% of the overall cost of the project — a totally unproductive
expenditure, usually due to the lack of an effective means for dispute prevention.
In this discussion, the term Dispute Review Board (DRB) is used as a generic
term, encompassing all forms of functional contract neutrals, whose selection
and modus operandi follow the same patterns.
Formation of a DRB
In the larger projects, DRBs usually consist of three highly-qualified, experienced
and respected professionals who have a solid background on the type of project
being developed. The World Bank SBDs include a variant — that of the Disputes
Review Expert, one person only, for smaller projects. This option is also open in
the ADB SBDs and the FIDIC Conditions (the former by reference to the latter’s
Form).
The FIDIC Guidance section sums up the importance of the selection process:
“The adjudication procedure depends for its success on, among other things, the
Parties’ confidence in the agreed individual(s) who will serve in the DAB. Therefore,
it is essential that candidates for this position are not imposed by either Party on
the other party”.5  Should the parties fail to agree on the appointments (or to the
later appointment of a replacement member), these are referred to a wholly
impartial entity. The FIDIC document suggests FIDIC itself as an option; the World
Bank SBDs list a number of international authorities that could be approached for
the purpose.
The World Bank SBDs (in its Annex A) and FIDIC (Clause 20) list a number of
requirements that must be met by DRB members, relating to their impartiality.
They include, inter alia, requirements referred to their financial interests,
employment record, professional or personal relationships, and fluency in the
language of the contract. After they are appointed, they must not be employed by
either of the parties, or engage in caucus or reach agreement with the parties or
the Engineer individually.
DRB members must maintain their impartiality throughout the period of their
activities, and disclose any circumstance that may impair their continuing
independence and impartiality, at which time they would resign and be replaced.
The documents also detail the conditions of engagement, such as payments
(monthly retainer, travel time, daily fees for site visits), office and travel expenses,
5  Conditions of Contract for Construction — For Building and Civil Engineering Works Designed by the Employer,
International Federation of Consulting Engineers (FIDIC), 1999. Guide to Clause 20.
Ernesto Henriod & Frank McDonough
170
Role of the Neutral
air fares (at “less than first class” in the WB SBDs), and taxes (which, in World
Bank projects, would be reimbursable). DRB members must remain available for
hearings, site visits and other Board meetings, on seven days’ notice. The World
Bank SBDs specify daily fees as established from time to time for Arbitrators
under the International Centre for Settlement of Investment Disputes (ICSID)
Administrative and Financial Regulations.
Usually each of the Parties covers one half of the DRB members’ fees and expenses.
Operation of a DRB
The above standard documents also detail the manner in which the DRB conducts
its activities, starting from the time its members sign a Declaration of Acceptance
of their terms of engagement, which is attached as an Annex to the WB SBD.
FIDIC includes ‘Procedural Rules’, also as an Annex. To sum up:
• the Parties to the Contract must provide all contract documents required by the
Board, including a regular supply of progress reports, variations orders and
other documents relevant to the execution of the Contract.
• the Parties must also coordinate the site visits by Board members.
• DRB members visit the site at regular intervals (usually three times each year),
and at times of critical construction events and at the written request of either
party.
• site visits are usually conducted in an informal manner, in the presence of the
Parties and the Engineer. On completion, the DRB prepares a report.
• should either of the parties object to a decision or lack of decision by the
Engineer, the matter is first raised in writing with the other Party. The other
Party presents its own views on the case and, if they fail to agree on a solution,
the matter is referred to the DRB, with a “request for recommendation”.
• after the DRB members determine that there is a case for the Board’s intervention,
a date and place for a hearing is established by the DRB. The hearing can be
carried out on site or at the place most convenient and cost effective for the
purpose.
• the hearings are conducted in the presence of representatives of the parties
and the Engineer, all of whom are given full opportunity to express their opinions
on the matters under dispute. DRB members do not express any views during
the hearings, but meet privately to formulate their recommendations, which
should be based on “the pertinent Contract provisions, applicable laws and
regulations, and the facts and circumstances involved in the dispute.”6
• The Board is urged to make every effort to reach a unanimous Recommendation.
6 The World Bank: Standard Bidding Documents — Procurement of Works. Washington, DC, January 1995.
171
The standard conditions of contract specify timings for the various steps involved
in forming the DRB, and in determining its participation in the resolution of a
dispute. They differ from contract form to contract form, and should be carefully
taken into account by Parties and members of a Board alike.
After the Board’s recommendation is received, the parties must decide whether to
accept it, or proceed to the next step — dispute resolution by arbitration or a
court of law, as the case may be. FIDIC proposes an intermediate step: that of
Amicable Settlement (Clause 20.6). As mentioned previously, there is an impressive
record of disputes having been resolved by DRBs.
The Construction Dispute Review Board Manual (see Footnote 2) offers detailed
advice on each of the steps outlined above, and should be required reading for
any professional appointed to a DRB. It is based on the experience of the
membership of the DRB Foundation, collected and edited by four of its prominent
members, all of whom have had extensive participation in DRBs.
Two Cases of the Application of a Dispute Review Board: The Ertan and
Xiaolangdi Hydropower Projects, China
In a letter dated 22 August 2001 to Frank McDonough, organiser of a World Bank
seminar on Dispute Review Boards7, Gordon Jaynes states “I am happy to report
that I now have obtained the necessary permission from the Xiaolangdi
Multipurpose Dam Project to report the successful completion of construction,
with no claims outstanding.” This is an extremely complex project costing a total
of 35 billion yuan, including US$1.2 billion dollars in foreign funds. It will provide
ice and flood protection, sediment reduction, irrigation, water supply and hydro
power (1,800MW).
Jaynes’ letter describes the contractors’ arrangements: “three Chinese/Foreign joint
ventures were involved in the main civil works, and were comprised of 10
Continental European constructors together with 4 Chinese constructors. Each
joint venture contractor was supervised by a Chinese engineering company, and
the Employer was advised by a Canadian joint venture consulting firm.” The DRB
was formed by three international experts of renown; Mr Jaynes chaired.
He concludes, “With admirable collaboration of all of the Project participants ...
the Project was completed in the summer of 2001, ahead of schedule, and all the
disputes were resolved amicably by the Project completion date.”
Previously, Ertan Dam had been completed successfully. This is the largest power
plant in operation in China, with an installed capacity of 3,300 MW. The estimated
final value of the civil works exceeded US$2.0 billion. Both Ertan and Xiaolangdi
were financed in part by the World Bank.
7 The cases are drawn from a collection of papers presented at a World Bank seminar on DRBs, on  19
September 2001. This addendum quotes, in particular, from the above letter from Gordon Jaynes, and from a
Paper by J Bradshaw: “The DRB Process—A View from the Trenches”.
Ernesto Henriod & Frank McDonough
172
Role of the Neutral
The Ertan Dam contracts were let under the previous version of FIDIC (4th Edition,
1987, as amended. FIDIC had not yet included DARs in the standard text). Two
joint ventures, consisting of Italian and German contractors respectively, each
associated with Chinese companies, were awarded the main contracts. Bradshaw
comments:
“the bold move ... of introducing a DRB in Ertan clearly had the
objective of assisting the diverse parties administer the FIDIC contracts
— which is a form of contract that requires a lot of administering.”
The final accounts were closed satisfactorily in the year 2000.
Bradshaw adds:
 “the DRB process derives much of its ‘zing’ (sic) from the fact that
the Board members are a mixture of engineers and legal people;
that they have relevant experience and visit the project regularly,
and so become familiar with it and the personalities involved BEFORE
troubles start.”
He also commends the generally informal character of the site visits and hearings,
at which all parties participate, and the issue of non-binding recommendations:
“...were DRB recommendations to be ‘final and binding’ it is
regrettably easy to predict that the whole atmosphere would change
and the whole process would rapidly become bogged down in the
same (heavy proceedings) that pervade arbitration...”
An important recommendation is that senior management should read any position
papers before they are submitted to the DRB and the Board convenes a hearing.
In this way, Bradshaw expects that many problems would be resolved before they
would become disputes to be reviewed by the DRB. This raises another important
issue in any negotiation and, in particular, in the DRB hearings. Since DRBs are
expected to resolve problems before they escalate to full-blown disputes, it is
important that those who read the submissions and set corporate strategy and
policy on the matter under discussion, as well as those who participate in the
hearings, are empowered to reach decisions.
“DRB hearings are not arbitrations or legal proceedings — and the hearing time
is short. It is necessary to get the facts on the table quickly.” Bradshaw suggests
that:
“[the] hearing process could be more efficient if the DRB were to
issue to both parties before the hearing a list of its questions,
based on the position papers received.”
Whilst the ability to take this step may depend on the time available, given the
particular circumstances of the project and the urgency for the resolution of a
problem, nevertheless it could save time and effort by all parties concentrating
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on the specific issues concerning the DRB.
“Every human endeavour is subject to gamesmanship, and the DRB hearing process
is no exception.” Last minute delays, denying the Board a site visit, and other
ruses have been used in the past; parties can also be “economical with the
truth”. Such delays and tactics “can become difficult for the most pragmatic of
chairmen.” The strength of the Chairman’s personality, and the respect he or she
commands in the industry and among the Parties is, undoubtedly, a major
consideration in the choice of DRB members and their leader. “The Ertan chairman
imposed some rather strict time tabling on the Parties, so obliging them to be
brief and to the point.” They were wise “draconian restrictions. Forced brevity
wonderfully concentrates the mind.”
These brief extracts from documents circulated in the World Bank seminar (footnote
7) highlight a number of important points regarding the operation of the DRBs.
Jaynes’ letter signals an important requirement for the work of any neutral to be
successful: the need for a spirit of collaboration among the parties to a contract.
Bradshaw also points out important features of DRBs and makes suggestions
from the point of view of a participant who was responsible for collecting and
presenting the points of view of the joint ventures: a soldier in the trenches, as
he described himself.
Ernesto Henriod & Frank McDonough
174
Role of the Neutral
175
10 The Causes of Contract FailureDerek Firth & Ernesto Henriod
In the previous chapters we have reviewed the law, the history of contracts, the new trends
in contract drafting, and the opportunities offered by a change in the culture of the contracting
industry and the emergence of collaborative approaches and the ‘contract neutral’. All
bode well for the future ... and it is to be hoped that the call for better contracts and better
contract relationships will be heeded. Nevertheless, we must keep an eye open for the
human failings that can create major difficulties and even the failure of contract — either
through leaving a sequel of disputes or causing the total breakdown of the project.
This chapter presents two accounts of the sources of failure: they are both drawn from
long experience, and expressed in frank and informal terms: first, Derek Firth gives his
views from a legal standpoint, quoting from his own experience in New Zealand and Asia
as a contract writer and arbitrator, to bring awareness to some major problem areas in
contract drafting and management. His paper is presented with a minimum of abbreviation
or editing: it has been written with the strength and passion that the failings he describes
elicit in a concerned professional.
Ernesto Henriod, a civil engineer, also brings forth his long experience as a consultant and
contractor in international and New Zealand practice, and many years as principal
procurement advisor and senior manager in the World Bank, to present a listing of the
human failings he has observed, failings that can bring a project into disarray. He also
gives practical examples of some human errors of omission or commission, and their effect
on projects.
This is a preamble to the penultimate chapter, in which eminent lawyers and engineers —
all of whom have considerable experience in the resolution of disputes through arbitration
and litigation — give their views on the steps that follow the setting of an impasse among
the parties to the contract, and the consequences of escalating disputes beyond the ambit
of the contract, and the parties and their immediate support.
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The Causes of Contract Failure
177
Contract Disputes — Reasons and
Resolutions
Derek S Firth
Introduction
Having been involved almost continuously on the legal side of construction projects
since the mid 1960s, it is impossible not to develop a number of biases and pet
hobby horses. However, I would like to think that the hobby horses which have
lingered will withstand objective scrutiny because they are the result of 35 years
of advising employers or contractors on a large range of civil engineering and
building projects in well over a dozen countries. Over the years these have included
a power station and its subsequent extension in Indonesia, offshore drilling
programmes in the Pacific and South China Sea, as well as many more traditional
construction projects. For many of those projects (including 12 hotels in New
Zealand in the last five years) I have been responsible for or involved in the
preparation of the original tender documentation. In that 35 year period there
must be well over 100 projects (some of them quite large) for which I had
responsibility for the conditions of contract.
I hesitate to say, although it is absolutely correct, that in not one of those projects
has any dispute ever proceeded to arbitration. Obviously, there has been a
significant level of good luck in this, but it is certainly a satisfying benchmark.
I now turn to the topics which I wish to address, in a somewhat informal
presentation. It is not appropriate to deal with these topics in ‘textbook’ fashion,
because these comments stem more from a feeling for what does and does not
work in practice.
Lack of Understanding of Basic Construction Law Concepts — resulting in
deficiencies in project documentation
Sadly, many advisors have simply not understood some basic construction precepts.
Equally sadly, this lack of understanding has often manifested itself in legal
advisors to banks and other funding agencies. A few simple examples follow.
During the 1960s and 1970s a body of law developed in England, the gist of
which was to the effect that if there was a provision for liquidated damages in a
contract, then an extension of time clause would be narrowly construed so that it
did not extend to the employer’s fault unless it expressly said so. The reasoning
was quite simple.  If any employer could rely on its own fault to extend time, and
therefore preserve the right to liquidated damages, it would be taking advantage
of its own wrong.
Many people used to make jokes about the New Zealand Ministry of Works, but
as long ago as 1983 it issued a revision of PW64 (its then standard terms and
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The Causes of Contract Failure
conditions) which expressly included in the extension of time clause the right to
extend time for any breach of contract by the Employer. For some 15 years I
subsequently said in numerous conference papers and annual lectures at a post-
graduation series run by the University of Auckland School of Engineering, that it
was essential to follow the lead of the Ministry of Works; that they had got it right
and that any extension of time clause which did not expressly apply where the
employer was at fault, would be negligently drawn.
I might as well have saved my breath because apart from a handful of construction
lawyers and the bigger consultancy practices, the point was ignored. The result
was an endless number of disputes where liquidated damages could not be
recovered and time was legally set at large. Even today, there are many lawyers
(particularly advisors to banks) who, I think, do not yet understand this very
basic principle.
A second example is the ability (or lack of it) on the part of an employer, engineer,
architect or project manager to hurry a contractor along. This difficulty stems from
other elderly cases in which it was held that, in the absence of an express provision
to the contrary, a contractor had an absolutely free hand as to how it managed its
work. It could do nothing for the first 90% of the time and magically finish within
the last 10% of time, if able to do so. As a result, standard forms of contract came
to include an obligation to progress diligently with the works. Other terminology
was used, but generally speaking most attempts to require the contractor to keep
moving expeditiously were clumsily handled and difficult to enforce in practice.
As a result, programme compliance obligations have become the norm, but these
are only as good as the skill of those who draft them.
The problem becomes exacerbated when concurrent causes of delay arise, some
being the fault of the contractor and some being the fault of the employer. In an
important Canadian case, generally followed elsewhere, it was held in 1966 that
where such concurrent delay occurs and it is not possible to accurately apportion
responsibility for the delay, then the contractor is to get the benefit of the doubt
and should receive an extension of time for the full amount of the combined
delay. This lead to standard forms being refined again but nothing seems to have
emerged which satisfactorily deals with this problem.
An experienced ‘claims-minded’ contractor, when confronted with a delay for which
it is responsible, will procrastinate with catching up in the hope that a subsequent
delay will be brought about by the employer. This could, for example, be as a
result of the late supply of drawings or materials or the like. The contractor will
know that as soon as a concurrent delay occurs that is the fault of the employer,
it will not be too difficult to fudge the consequences of its own earlier default.
To deal with this common difficulty some of us devised, back in the 1970s and
early 1980s, a contractual regime with two specific requirements. The first was to
give the employer an option to require a contractor to accelerate (at the employer’s
expense) where the contractor was entitled to an extension of time. The second
179
was to require the contractor to catch up delays for which it was responsible
within a given period such as a month or other reasonable time acceptable to the
engineer.
A graphic example illustrating the importance of retaining the right to manage
delays is the dewatering of the foundations of a plant or a tower building project.
A week of lost time (near the beginning) might be caught up by doubling the
number of pumps at a cost of say $10,000. If that week’s delay is not caught up
at that time but has to be caught up in the final week of the project then the
additional cost could be a quarter of a million dollars or more for exactly the
same length of delay.
Thirdly, the variations clause is often misunderstood. If circumstances arise within
the ambit of the variations clause, then the contractor is entitled to a variation.
Furthermore, the law is quite clear that even if a situation is not directly covered
by the variations clause but the circumstances demand a variation (for example,
arising from a deficiency in design, or a fault or breach on the part of the principal),
then the law will often deem those circumstances to constitute a variation and an
arbitrator can retrospectively grant a variation order from a certain date. These
circumstances are becoming known as ‘deemed variations’.1 In similar
circumstances, where a variation order has been wrongly refused, the courts have
found a remedy through the principles relating to unjust enrichment.
With this in mind, it is therefore utterly nonsensical to see provisions in contracts
requiring the consent of a financier to any variation, or any variation above a
certain threshold. In fact, what is so dangerous about such a provision is that if a
variation should be ordered (either because it is within the ambit of the variation
clause or it is a deemed variation) and it is refused, then the contractor will have
a number of remedies at its disposal, not the least of which is an entitlement to
damages; and the range of remedies may well extend to time being set at large
and all rights to liquidated damages being lost.
A fourth example is the method of valuation for progress payments. Under virtually
every standard form of contract the contractor is entitled to progress payments
based on a valuation of the works or percentage completed.2 However, it is not
uncommon for financing agreements (which are between the lender and the owner
or developer) to limit progress payments to ensure that there will always be held
back sufficient monies to complete the works.
On most jobs, a traditional valuation approach and a cost to complete approach
will coincide, or not differ greatly. However, on some projects a significant gap
1 See the line of reasoning adopted in Brodie v Corporation of Cardiff [1919] AC 337, Holland and Hannen and
Cubitts (Northern Limited) v Welsh Health Technical Services Organisation (1983) 18 BLR 80, State Rail
Authority (NSW) v Baulderstone Hornibrook Pty Limited (1988) 5 Building and Construction Law 117, and at
123 for a list of further authorities.
2 As a matter of passing interest, the New Zealand Construction Contracts Bill which is expected to be enacted
later this year will provide a statutory entitlement to periodic payments based on “the value of the construc-
tion work carried out...”.
Derek Firth
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The Causes of Contract Failure
can develop and widen. If a contractor is clearly entitled to be paid on a value of
work done or a percentage complete basis, but monies are being held back
because the quantity surveyor advising the funder is reacting to a cost to complete
approach, then the employer is simply acting in breach of contract and the contractor
can stop work or sue for damages. Of the many contracts that I have seen for
recent developments in Auckland, I have on only one occasion seen a provision in
a contract which expressly states that while progress payments will normally be
made on a value of work completed basis, the funds will be drawn down on a
cost to complete basis and if there is a difference the contractor will have to live
with it. That’s fine, (although it might not be after the Construction Contract Act is
passed — see footnote 2) since the contractor was warned and tendered on that
basis. But it is absolutely dishonest to administer a contract on a cost to complete
basis without being entitled to do so under the contract.
One common feature of the above recommendations is that they are not unfair to
the employer or to the contractor. Further, the contractor is not, in the above
examples, required to react to the whim of an unscrupulous employer or project
manager and go uncompensated in draconian circumstances.
Lack of Adequate Design (where there is a traditional form of contract)
For a long period of time it was standard practice to complete a detailed design
before tenders were called. The scope of work was clearly defined and the pricing
was likely to be fairly accurate. Considerable care was taken to get the design
right because it was known that any changes would constitute a variation. Everyone
knew where they stood — whether the design remained unaltered or not.
However, in more recent times, it has become quite common for work to be put
out for tender when the design is far from complete and yet where the contractor
is somehow supposed to live with the risk of what will turn up in the future in the
designer’s mind. Those who try to draft smart clauses to ‘stick’ the contractor with
that risk [for example, through ‘lump sum’ or ‘Guaranteed Maximum Price (GMP)’
techniques] are, in my opinion, behaving irresponsibly.
[Since preparing the rest of this paper I have come across the very important decision in
Multiplex Constructions Pty Limited v Epworth Hospital, Court of Appeal of the Supreme
Court of Victoria, 28 June 1996 (apparently not reported.) This is a majority decision of
Phillips and Charles JJ.A with Brooking JA dissenting. All three judges say that the case is
unusual based on uncommon special provisions and it is probably for this reason that
the case has not been reported.
However, the case does reflect circumstances which, in principle, are all too common in
the construction industry. Multiplex tendered a lump sum price of AUD52.975 million to
do extensive work for Epworth Hospital. This included the demolition of some buildings,
the refurbishment of others, and the addition of new buildings including a large block
for an additional 350 beds.
The variation clause started off in standard from but it concluded with an additional
provision purporting to exclude from being a variation “any change/s or additional
181
work/s caused by or resulting from the development of the design of the Works (including,
without limitation, the development of the design for that part of the Works not
documented or not fully documented as at the date of the Builders Tender and/or in the
Design Development Drawings or the Design Development Specification(s)).”
There were other specific provisions making it clear that the Design Development remained
incomplete and was to be fully documented; also; that “...the Contract Sum includes all
allowances to fully compensate the Builder for all risks and contingencies (whether
ascertained or not ascertained) and costs and expenses and any varied, changed or
additional works caused by or howsoever resulting from the Design Development of the
Works...”
The builder made a claim for over one thousand variations that it said were not caught
by the exclusion relating to design development. The sum claimed was approximately
AUD 3.4 million.
Twenty sample items (selected by agreement) were referred to the Special Referee. Four
were withdrawn; of the remaining sixteen, eight were held to be variations, five were
held to be covered by the exclusion clause and therefore not variations, and three were
held to be variations in part.
The Special Referee decided that, in respect of aspects of works fully exposed in the
tender documents, only ‘refinements’ would be permitted at the expense of the builder.
However, for those aspects in which “the design development process was incomplete
or possibly not commenced at tender” additions or increases in the works might be, but
not necessarily were, to be at the builder’s cost; each item was to be assessed on its
individual merits. (It was accepted that all changes would have been variations if the
exclusionary provision had not been present.)
The report was then the subject of argument before Byrne J who disagreed with the
approach adopted by the Official Referee. Byrne J held that changes to the design did
not fall outside the meaning of ‘design development’ provided the function of a component
part of the works was not altered. He considered that only part of one alleged variation
was truly a variation and the matter was referred back to the Referee who issued a
second report adopting the approach of Byrne J.
On appeal to the Court of Appeal of Victoria, Brooking JA preferred the reasoning of
Byrne J. However the majority preferred, generally, the reasoning of the first report of the
Special Referee: the majority decision summarised the position, “...the redesign of what
has already been designed will fall outside the exclusionary proviso...” (And therefore,
being something different from design development, was to be treated as a variation).
In my respectful opinion, the decision of the majority is, unquestionably, correct. Somewhat
ironically, the dissenting decision of Brooking JA commenced by saying, “The letting of
construction contracts where design is the responsibility of the owner’s architect or
engineer and at a time when the design is far from complete is a common practice and
one which gives rise to many disputes.” He then quotes from Dunham & Young’s Contracts,
Specifications and Law for Engineers, (fourth edition by J T Bockrath, pp249-50) where
the dangers of rushed and inadequate preparation of tender design documents is
emphasised.]
There is nothing wrong with seeking a price for work where the design is not
complete; but the contract documents must not only reflect that position, but
have within them a fair mechanism for dealing with it. In fact, it is not too difficult
to do so. It simply comes down to a careful definition of the scope of work
intended to be covered by the original price.
Derek Firth
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The Causes of Contract Failure
Inadequate Definition of the Scope of the Required End Results (for a design-
build contract)
Equivalent problems arise with design build contracts because many do not focus
on the most obvious requirement — defining the end results. A simple example
can be given with regard to the mechanical services. In a standard traditional
form of contract, the specification would define the size and extent of the ducting,
the exact type of the heating and cooling equipment, the capacity of the fans and
all the other detail which would go to make up the system. In other words, the
contractor could safely assume that if it didn’t work it would be the designer’s
fault.
A design build specification for air conditioning need not address any of the
matters just referred to. It should define end results: design life, future maintenance
parameters, temperature range, air change frequency, and so on. Only then can
the design-build contractor be at fault if the system doesn’t work.
Amazingly, a number of employers call for design-build prices yet the specifications
follow the traditional form of stating the method to be followed for construction.
This recipe for certain trouble could not be more elementary to foresee and avoid,
yet it is hard to comprehend how even this basic concept is often not understood.
With design-build contracts there will be a few — very few — aspects of work
where the method needs to be defined. The finishes provide a classic example.
But there will be little else unless the employer is clearly intending to retain some
design responsibility.
Lack of Understanding of the GMP Concept
Of all the fashionable trends in construction projects, this takes the cake. Where
did the guaranteed maximum price (GMP) concept originate? Not with anything
we ever see in traditional buildings. Not with residential apartments, not with
commercial premises, not with industrial premises, not with hotels, or anything
similar.
The whole concept was developed in the field of civil engineering with complex
projects where very sophisticated international contractors had better in-house
expertise and design capability than most private consultants. It was in this
setting that such contractors were willing to be bound to a GMP concept. This
was because they had the skill to design the petrochemical plant, or design the
sub-sea pipeline, or design whatever it was. If they were not the principal designer,
they had some design input, and always had the skill to reasonably foresee the
ultimate scope of work.
Many consultants and lawyers thought they would do their clients a favour by
introducing the same concept into every kind of construction project. However,
because of the relative straightforwardness of many projects, most tenderers do
not have any sophisticated in-house design capability. They simply cannot properly
183
assess the final scope.
Developers and other employers have been wrongly/badly advised to call for
tenders on a GMP basis (unless the project is one of those rare ones where it is
appropriate). Many, sometimes all, of the tenderers have no capability whatsoever
of knowing what the maximum price might be or how to calculate it. The design
is always incomplete at the time of tender (otherwise there is no need to even
consider the GMP concept) so the whole process is usually a nonsense. If the
contractor fails to complete or goes under, the employer and the consultants
have only themselves to blame.
The main problem with GMP contracts is that the scope of work (including the
end results) is not properly defined. How can any contractor price any job
(traditional, design build, GMP or anything else) if the scope of their work is up in
the air and left to the whim of future decisions by others.
A good definition of end results is an essential feature of a GMP contract as it is
for a design build contract. How an employer or its consultants, believe they can
bring a traditional approach to bear (where the employer has full responsibility
for design) and then thrust a guaranteed maximum price on to a contractor where
the design is not fully developed and the contractor has no design skills, is
simply beyond belief. It is commercial naiveté at its worst.
Funding Terms which can Strain or Jeopardize the Certification Process
One has the impression that financiers and their advisors feel that the position of
a lender is best protected if the contractor is placed in a financial straightjacket
regardless of what the final scope of work might be. Such an approach overlooks
the basic principles discussed earlier in this paper. Such an approach displays
ignorance of construction law. Such an approach will never, ever succeed.
Hopefully, everyone understands that a construction project depends upon adequate
funding; but ‘adequacy’ depends on allowing not only for the information available
to be priced, but also for the cost of changes in scope and the other inevitable
problems that arise which increase cost. If the total available funding is perceived
at the outset to be a bare minimum, then it will never be enough.
Another harmful approach is where the funding terms limit each draw down to a
cost-to-complete basis, when that is not the contractual basis for payments to
the contractor. This has already been discussed.
The involvement of the financiers in variation decisions can be a recipe for disaster,
as discussed earlier, unless it is in a rational setting. Obviously, the involvement
of financiers is justified if the variations relate to truly optional changes. But a
blanket requirement for financier’s approval to all variations simply displays a
complete lack of understanding of the construction process and of construction
law. In fact, it displays such a high level of ignorance that no true construction
Derek Firth
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The Causes of Contract Failure
lawyer worth his or her salt would want to be associated with it.
An Australian tendency has shown signs of catching on here on occasion. That is
the concept of the financier being a party to the construction contract. To be quite
honest, I have not yet got my head round the ramifications of this. It seems to me
that it is an approach which must be fraught with danger unless carefully
implemented.3
A lack of Understanding by Certifiers as to their true Functions and Obligations.
It is very important to remember the number of people who rely on proper
certification — the contractor, the financier, the employer, the owner (who may be
different from ‘the employer’ in a contract), lessees, purchasers, insurers and
probably others from time to time.
Interim Payment Certificates are of vital importance to the owner or developer as
they are the official measure of the value of work to date. Those certificates are of
vital importance to the contractor because they establish cash flow.
The Certificate of Practical Completion is important for other reasons. Up until
that point, the employer is entitled to require full compliance with the contract
(except for normal maintenance or remedial works). However, once the Certificate
of Practical Completion is issued, the employer is deemed to have accepted
anything that is obviously not in compliance with the contract. If the employer
does not like the non-complying work then the simple solution is to insist that
the certifiers do not accept it. An example might be the type (as opposed to the
quality) of any finishing, the colour of the roof (unless it is immediately flagged as
a maintenance item), and other things that might be different from what has been
specified, but which are plainly in evidence.
Too many certifiers try to have it both ways by certifying prematurely and then
endeavouring to ‘stick’ the contractor with something which should have been
identified earlier as being unacceptable. Sometimes developers will acquiesce in
the premature issue of a certificate of practical completion so that they can uplift
deposits from ultimate purchasers and enforce settlements.
In a nutshell, the certification process is often abused and this leads to many
difficulties which can easily be avoided.
Warning from a recent case: In March 2001 the Singapore Court of Appeal handed
down its decision in Hiap Hong & Company Pte Limited v Hong Huat Development
3 In this connection, it is interesting to note the World Bank rules (which apply in other international financing
institutions): the Bank does not participate in the management of contracts in any way, and its loan officers
are banned from passing judgment on the evaluation of bids (other than ensuring that the Bank’s Procurement
Guidelines were complied with) or participating in project management. This is based on simple principles:
first, the sovereignty of its borrowing member countries over development work in their own territory; and
second, the exposure of the lending agency to acquiring the responsibility for contract failure, when associated
with judgments passed by the Bank or its Officers. See also Appendices, Note on A Araujo’s statements.
(Editor’s Note)
185
Co (Pte) Limited [2001] 2 SLR 458. In short, the architect employed by the employer
failed to issue progress payment certificates in a timely manner. In a judgment
that seems to totally ignore well-established principles adopted in most countries,
the Court of Appeal held that there was no implied term imposing a contractual
obligation on the employer to ensure the proper discharge by the architect of the
certifying functions. Accordingly, where it was established that the architect was
late in issuing interim certificates entitling the contractor to progress payments,
the contractor had no claim to interest or other compensation against the building
owner for loss of use of the monies that were received late.
I am aware that some standard forms of contract specifically address this issue,
as well as late payment of a certificate (see, for example, clause 51.4 of the New
Engineering Contract4), but that is probably the situation in a minority of standard
forms.
In the above case there was ample authority to justify the opposite decision.
Examples are to be found in the cases cited earlier in relation to deemed variations.
In addition, there is the very good decision of Judge Vinelott in London Borough
of Merton v Leach (1985) 32 BLR 51, at 81:
“In Holland Hannen and Cubitts v Welsh Health Technical Services
Organisation ... it was conceded that under the contract there in
issue ‘...the building owner would do all the things necessary to
enable the contractor to carry out the work’ and His Honor Judge
Newey clearly thought that that concession was rightly made. For
the reasons I have given I think that this implied undertaking by the
building owner extends to those things which the architect must do
to enable the contractor to carry out the work and that the building
owner is liable for any breach of this duty on the part of the architect.”
In addition, there is the compelling reasoning contained in the Australian decision
Perini v Commonwealth [1969] 2 NSWR 530. In that case, it was held that the
employer was liable for the failure of the certifier to perform those duties properly.
The certifier was an in-house person, but that makes no difference in principle.
The reasoning of the Singapore Court of Appeal was that when an architect
certifies, the architect is exercising a professional skill, opinion and judgment and
must act fairly, impartially and independently. In so doing, the architect cannot be
the agent of the building owner, because such impartiality is irreconcilable with
the primary duty of agents to protect the interests of their principal. Therefore,
building owners do not undertake or guarantee that the architect will exercise
those powers reasonably.
In my respectful opinion, the well-entrenched English law is to be preferred.
4 See also the FIDIC New Red Book, Section 14 (Editor’s note).
Derek Firth
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The Causes of Contract Failure
Constraints on the Activities of Design Consultants and Certifiers through
Attempted Cost Savings
Some developers seem to think that if they do not provide adequate certification
during the period of the building project, nor pay fees sufficient to ensure that
there is proper certification, somehow at the end of the day they will be able to
fudge the position and the potential problem will go away. This is bizarre. It never
happens that way. The certifiers need to be identified at the outset, be employed
under terms of reference which will satisfy all third parties with an interest in the
project, and be paid appropriately. Consultants who have a certifying role must
stand up to any pressures which run contrary to such a necessary approach.
The original or novated consultants must be properly paid for their design,
supervision and certification obligations. If their fees are unreasonably cut or they
are allowed insufficient time to discharge their duties then, of course, there will
be problems. Of course things will not be done properly. Of course there will be
deficiencies in the work.
One of the many things which puzzles me about the terms of engagement of,
particularly, architects, is that they draw a distinction between simple observation
and a more thorough form of inspection. Yet, if the architect is going to be relied
on later to certify practical completion, it is difficult to see how he or she can
properly do that unless providing more than mere observation during the progress
of the work. Perhaps the problem is with my lack of understanding of what these
terms mean but I can say that in a number of arbitrations the problem is a real
one. The architect has been paid to ‘observe’ but at the end of the job has simply
issued a certificate of practical completion on a wing and a prayer, because such
‘observation’ has really not been enough to form the basis of the issuing of the
certificate.
Certifiers (whether salaried in-house staff of the employer or not) must stand firm
and act objectively and independently. Unquestionably, the vast majority of certifiers
set out to do their work fairly and conscientiously. But it is very difficult for them
to do this if they are pressured by an unscrupulous employer, especially if they
have been silly enough to take on the job for an uneconomic fee.
Inadequate Supervision — poor quality work
While there is a body of law which makes it reasonably clear that a poorly
supervised contractor cannot escape liability through lack of adequate supervision,
it is quite inappropriate for an employer/developer to rely on that strict legal
position. Yet it is surprising how often the developer will give a contractor a free
hand, and then complain at the very end of the job when there is a disproportionate
amount of remedial work to do. This is an example of false economy at its worst,
yet it is such a common occurrence. Of course, a contractor is obliged to work in
a workmanlike manner. But anyone involved with the building industry will know
that even the most conscientious and professional contractor will have lapses
187
within their internal supervisory forces and it is simply false economy to think
one can pick everything up at the end of the job. Proper regular independent
supervision is essential and, at the end of the day, by far the cheapest option.
One of the difficulties with major engineering works is that a plant may not quite
function to specified capacity and the question then is — what happens? Does
the employer make the contractor remove the turbine (performing fractionally
under the specified minimum rating) and return it to Germany or Japan, with all
the consequential delays, even though that might be at the contractor’s expense?
The short point is that no employer will want to do that. Yet if that is, effectively,
the employer’s only real remedy the employer is simply caught short. Certainly
the employer may have an entitlement to damages but they will be difficult to
compute. There can be similar problems, in principle, with much smaller jobs —
even in house building.
Accordingly, I have introduced a pet provision in contracts, to the effect that
where there is defective or faulty work then the employer may at its option, either
require the work to be remedied, or be compensated. Compensation will be
either on the basis of the loss to the employer, or on the basis of the remedial
cost avoided by the contractor, which ever is the greater. This provides an enormous
incentive to a contractor to get things right from the start, but it is not an unfair
provision overall.
Derek Firth
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The Causes of Contract Failure
189
The Human Factor in Contract Failure
Ernesto Henriod
Introduction
This paper sets out to review some of the human foibles which underlie most
contract failures, and discusses some examples of failure caused by errors of
omission or commission — all due to the human factor. They are drawn from my
long experience in the international arena with consulting and contracting
companies and the World Bank, and in New Zealand and Peru, my native country.
The Human Factor
Contracts are presumed to bring about a meeting of the minds. They are presumed
to be agreements to perform certain functions for the benefit of one of the
parties, in exchange for a consideration to be received by the other party.
In a perfect world,
• the parties will act in good faith;
• risk will be allocated fairly;
• the contract will take care of all the circumstances of project execution;
• cash will flow without problems, and so on.
In sum, there will be no cause for any of the parties to the contract to seek extra
compensation for a real or fancied grievance.
However, we do not live in a perfect world, nor is it a world ruled by mathematical
equations and models. The toughest aspect of management deals essentially
with the knowledge of human nature and its weaknesses. A manager must be
sensitive to human failings; he or she must be able to identify and deal with
human problems and emotions.
Most problems of contract management arise from misunderstandings, lack of
communications, lack of knowledge or skills, gullibility, ignorance, greed, arrogance,
intransigence, aggressiveness, insolence, timidity, complacency, laziness, negligence,
chauvinism, or dishonesty, to name but a few. They are not listed in alphabetical
order, nor in the order of their importance: each of those human failings can bring
about a serious disruption of a project, or its utter failure. They apply to the large
and the small, housing, civil works or major industrial plant — any size or kind of
project can fall prey to such shortcomings.
All projects require managers, and managers must manage people: they can only
achieve results with people. Managers cannot expect to do everything by
themselves, have a finger in every activity that takes place around the project.
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The Causes of Contract Failure
Likewise, they cannot expect to be masters of all the technology and skills involved
in managing a complex project or a factory. A manager must be, in essence, a
delegator, a person that surrounds him or herself with the right people, and then
empowers them to act, or draws from their counsel to reach executive decisions
— that are carried out by others.
The problems usually start at the inception of a contract relationship.
Take for example, a contract that goes sour because a key circumstance that is
peculiar to the project was not foreseen when writing up the contract, by willing
or unwilling omission. The contract then has a major inception flaw which later
results in a serious problem and leads to a dispute between the parties:
• was it arrogance of the parties — they knew better, they would just use an
existing form of contract without adjustment, or without consulting with a lawyer.
• Or was it laziness, negligence or ignorance — take the easy way out, copy the
existing form, and be done with it!
• Or — did one party rely in the gullibility of the other party, and introduce a
‘trick’ clause which would open opportunities for claims or unpaid extra work?
Or ...
The pitfalls in contract management cannot be ranked as to their importance or
economic significance. At most we can identify them and class them as to their
origin. They are not accidental: they are created by one or both parties (or more
parties, in a multi-party agreement). Hence the listing which appears at the end of
this paper. Is it complete? It would be presumptuous to claim such crystal ball
clairvoyance ... but it’s a start. And let me stress, at this point, that many of the
causes listed can pertain to more than one of the actors in a contract — owner,
designer/project supervisor, and contractor.
I will not review each of the items in the list; rather, I will give you some illustrations
from cases from my own experience.
A disturbing case: Kariba Dam, Second Stage
I will start by quoting from a book that is an eye opener for all engaged in
international business. The book had a very strong impact on me the first time I
read it, to the point that it became almost an ‘own experience’ — particularly as
I knew some of the characters involved. The book was written by David Morrell5,
Managing Director of one of the largest British contracting companies of the
1960s and 1970s, Mitchell Construction. It is called Indictment and it portrays a
worsening environment of the construction industry in the UK over those decades,
leading to the demise of Mitchell Construction after the catastrophic failure of the
5 David Morrell, Indictment: Power and Politics in the Construction Industry, Faber and Faber Limited, London.
ISBN 0-571-14985-5.
191
contract for the second stage power station for Kariba Dam, jointly owned by
Rhodesia (now Zimbabwe) and Zambia.
In essence (and to quote from Morrell’s book) the Kariba dispute arose because
of a radical difference in the quality of the rock expected to be present in the
excavation of the huge underground machine hall — “as given in the contract
documents and warranted to be accurate” — and those actually found after
excavation started. Whilst the bid had been prepared on the expectation to find
sound granite, requiring only minor support during excavation, the actual rock
encountered was very poor, requiring radical changes in the sequence of
construction, and massive support.
In a further quote from the same book, a panel formed by two prominent rock
scientists, and chaired by a barrister nominated by the Owner concluded that:
(b) “as to the factual accuracy of the borehole records referred to
in clause 12(3)(b)(i), the Panel finds that they were NOT factually
accurate
(c) as to whether the conditions encountered in the Machine Hall
could or could not reasonably have been foreseen by an
experienced Contractor at the time of tender, the Panel finds
that the said conditions could NOT reasonably have been so
foreseen.”
In spite of this definite statement by the Panel, Morrell and his company found
themselves fighting a losing battle with the supervising engineers, the client and
the insurers, while construction continued at Kariba, demanding millions of pounds
sterling in extra work and extra shoring and protection, with the project being
considerably delayed by the actual site conditions. According to Indictment, the
Owners and their consultants refused to acknowledge the problems and pressed
the Contractor for timely performance as per the original Contract schedule.
In sum, Mitchell lost the case, and the company went into liquidation. The underlying
problems that brought about the Kariba disputes:
• did they arise from an oversight of the Engineer?
• Did the Owner place unreasonable demands on the Consultant and Contractor?
• Should the Contractor have taken extra precautions when examining the bid
documents and the actual site and borehole cores, given the massive underground
excavation to be undertaken?
• Or—did Mitchell make use of a perceived loophole, ignoring the evidence of
the existing geological core samples in their bidding strategy?
I shall leave you to draw your own conclusions, reading Morrell’s book.
Ernesto Henriod
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The Causes of Contract Failure
A Case of Wise ‘Abstention’
At about that time, I was part of a team (with another British contractor) bidding
for a 20 km long tunnel under the Andes, in Central Peru. The tunnel was planned
across a major ridge, with 2,000 metres of rock cover over the middle section,
and major faults crossing the tunnel line, with the certainty of water intrusion. My
employers wisely refrained from bidding a firm price and instead proposed a
target contract, which was rejected by the owners. Another contractor got the job;
huge increased costs and disputes followed. Needless to say, the project took
longer than anticipated, and cost several times more than the original estimate,
as well as many lives. I was young and anxious to go ahead with the challenge of
the long tunnel — and greatly disappointed when we refrained from bidding. But
later on I realised the importance of the lesson, and how wise the decision of my
employers had been.
A Case of Over-eagerness
By contrast, another major international firm came into severe difficulties when it
ignored basic principles of caution in entering a new market: they were eager to
enter the huge market of an emerging Asian nation. The international firm allied
itself with a local firm to bid for the contract for a major motorway. The foreign
firm was to provide technical know-how and management, whilst the local company
would furnish all the heavy construction equipment. The two members of the
joint venture would be jointly and severally responsible for the contract.
After the contract was signed, and the foreign personnel had arrived on site to
start work, it was found that the local firm’s equipment was otherwise committed,
and would not be available for the contract. The local firm had no additional
financial resources to acquire more heavy equipment. Meanwhile, the expatriate
personnel and families already in the country could face problems with the
government. It cost the foreign contractor a large sum (double-digit millions of
dollars) to extricate itself out of the contract and repatriate its staff. In their
keenness to get the contract, the managers had failed to ascertain that the actual
equipment was available before embarking on a major contract. A simple physical
inspection would have shown the location and availability of the equipment.
International Consortia and Joint Ventures
Many problems can arise in joint ventures, consortia, or other forms of association
between international and local firms from developing countries. Trusted local
legal counsel must be engaged to draw agreements that will protect the partners
in terms of the local laws. One common failing is that of sharing management
responsibility: the association agreements may appoint foreign and local ‘co-
managers’ to manage the joint venture. If the local manager is not up to strength,
or simply does not turn up at critical times, decisions may be left to the expatriate
manager. If matters go wrong after one such decision is taken unilaterally (regardless
of the lack of capacity or absence of the local counterpart), a major dispute can
193
arise among the partners that can lead, in extreme cases, to abandonment of a
contract or a major dispute with the client.
Client Supply of Critical Components
A project for the supply, erection and commissioning of a manufacturing process
involving four separate stages was bid by the owner in three packages, for each
of the first, second, and fourth stages, reserving the third essential stage for its
own national company. International companies, anxious to enter this important
new market, won contracts for the other three stages. The three foreign companies
performed on time, and expected to be paid in full. However, the contract required
that the production chain be fully functional, with proven production quality and
volume, before disbursing the last payments. The third stage was not available
on time and thus, the client would not pay for the three foreign-supplied stages,
since production was not possible.
• Another case of over-eagerness for sales?
• Should the bids have been tagged to counter the risk of a delay caused by the
local supplier?
• Should the foreign firms have allowed for delays within their bids?
• Could the foreign firms have lost contract awards by adding a cushion for
delays?
The last example illustrates a potential source of problems, when an owner,
looking for economies, undertakes the supply of components essential to the
overall performance. For instance, delays have arisen in pipeline projects when
the pipes to be supplied by the owner fail to arrive on time. Further, the owner
then acquires a contractual responsibility for the performance of the materials
supplied, in terms of time and quality. The owner may become liable to delay
claims, negate liquidated damages, or simply, void the warranties provided by
the contractor.
These are examples of what happens at the conception and tendering stage of
projects. Contractors and suppliers can be gullible and fall prey to their own
desire to establish themselves in new, attractive markets. Owners can try to
arrange the supply of inputs to suit their own convenience — or may dictate
forms of contract that are not the best suited for the project — for legal or
political reasons. And less-than-fair or -truthful dealing can enter the equation:
human failings!
A Major Source of Issues: the specifications
Specifications are often the root cause of disputes. In some cases, the specifications
are defective or unclear; however, the more frequent case is that those carrying
out a contract ignore perfectly sound specifications.
Ernesto Henriod
194
The Causes of Contract Failure
Take the case of an airport to be built in the Peruvian Andes, near a major tourist
area, in mountainous, high-altitude terrain. The contract with the project consultants,
a large international engineering firm, required that they design a runway capable
of handling Boeing 727-200s, taking off with 120 passengers and full luggage.
The consultants ignored this requirement and, considering that the airport would
service an important tourist destination, designed the runways for 747 aircraft—
a much larger and powerful airplane. However, the local fleet, consisting mostly
of older 727-200s would have to reduce their payloads by at least one half to be
able to use the runway, as designed for the 747 takeoff characteristics. The
runway had been sited on a plateau with limited expansion possibilities. A long
dispute followed, involving two governments and international agencies. But, in
essence, one of the basic contract requirements had not been fulfilled.
‘Industry Standards’
Engineers and architects often resort to general references to industry standards,
when specifying equipment. The new World Bank Main Complex in Washington
DC, included an industrial-scale kitchen in the second basement, requiring large
ventilation ducts running up the equivalent of about 16 storeys, to extractor fans
and diffusers in the roof service area. The architect vaguely specified a published
industry ventilation standard. Under one category, ‘Office Buildings’, the standard
could be interpreted as requiring relatively light plate and few supports along the
riser shafts. The contractor bid on this basis, and installed the light plate ducts,
whilst the architect’s personnel supervised construction and did not raise objections.
The ducts failed in operation: first, vibration was noticed in offices adjacent to
one ventilation shaft; then, the Bank’s maintenance engineers noticed there was
insufficient draft from the extraction system, and installed a 50% more powerful
extractor fan on the roof, without consulting the architect. While working on the
fan upgrade, the extractor fan cut-off switch for the kitchen buffers was
disconnected.
Collapse followed, with general finger-pointing:
• the architect’s specification had not been clear;
• the contractor should have known it was an industrial-scale kitchen and should
have supplied a strong enough duct;
• and the owner had interfered with the system, increasing the extraction power
and disconnecting an essential switch.
Whilst a dispute was avoided through the partnering arrangements applying in
that contract, and the cost of repairs and upgrading of the ducts was shared by
all parties, the costly remedial work and commissioning delays should have been
avoided by correct specification and supervision, with good communications among
all parties. Once again, human error or omission: insufficient attention to detail in
the specification, lax supervision, and poor communications.
195
Client Eagerness: ‘fast track’ projects
Fast-tracking means: cut corners with the schedule, start construction before all
drawings are complete, design and build as you go. If the project is simple, and
the sequencing is straight forward, problems may not arise. But if the project is
complex, fast tracking can be a recipe for disaster.
A large office building, of over two million square feet, was to be built in three
stages.6
Construction of the structure for the first stage started before the service drawings
had been finished — and the owner and the architect were still arguing about
what the services would look like. When the plumbing, electrical, HVAC and
communications drawings were finished, it was found that most of the slab
penetrations were in the wrong place. There were over 5,000 variations involved
in the early stages of the project. Why did this happen? It was a combination of
the owner’s lack of preparation and understanding of what was involved in the
project, an architect determined to do the job, come what may, and a contractor
who was only too happy to oblige — and price the variations in a captive
market.
In Conclusion
We have read the Papers written by eminent professionals, telling us about efficient
means to achieve timely results in project execution, by making use of the newer
forms of contract, and the new approaches at preventing and resolving disputes.
Whatever course is chosen, the human factor shall be the primary cause of success
or failure in any enterprise. This is particularly true when considering partnering,
and other forms of contract that come away from the traditional adversarial
relationships, engineer/contractor or architect/contractor, and rely essentially on
goodwill and understanding.
The examples given in this paper are but a few instances of contract problems
arising out of human errors or failings. The listing that follows — which the writer
presents as a “first sketch” — should warn us of where to look for some of the
more obvious potential causes of contract failure.
Common Causes of Problems and Disputes in Contract and Project
Management
The Owner
• Ill-defined requirements, timing, financial provisions.
• Poor choice of consultant: engineer, architect, project manager, quantity surveyor,
accountant, or legal advisor.
Ernesto Henriod
6 For a fuller description, see Chapter 9, page 163
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The Causes of Contract Failure
• Poor prequalification and tendering procedures, or abuse of those procedures,
including two- and three-envelope selection; careless analysis of bids.
• Award to the lowest bidder, regardless of qualifications and experience.
• Lack of legal/contract support.
• Lack of management and financial control capability.
• Insufficient delegation to contract management representatives or, conversely,
delegation without accountability.
• Interference with contract management. Opening up an ‘Owner’s window’.
• Changing requirements as the contract proceeds — excessive number of owner-
driven variations.
• Protracted payment procedures, hampering cash flows to consultants and
contractors.
• Corruption.
• Poor communications.
The Consultant 7
• Fraudulent presentation of qualifications and experience.
• Highly qualified personnel listed in a proposal for consulting services are replaced
with lesser ranking staff for the actual job.
• Incomplete site investigation: incorrect or defective information is gathered/
published and used for design and estimating.
• Poor drawings or specifications.
• Errors or omissions in drawings or specifications.
• Internally conflicting documents (contract/drawings/specifications).
• Poor estimating and cash flow projections.
• Insufficient attention paid to programming and scheduling.
• Arrogance, condescension or intransigence displayed by contract or project
manager/supervisor in dealings with the contractor.
• Corruption.
7 In this note, ‘Consultant’ includes one or more of the professionals usually engaged by an owner (or forming
part of the owner’s own staff ) to design a project, assist in the tendering and award process, and supervise
implementation.
197
• Poor communications.
The Contractor
• Fraudulent presentation of qualifications, experience or financial strength.
• Poor evaluation of contract documents, poor estimating.
• Poor site management: lack of experience of contract manager and personnel.
• Insolent or abusive attitudes vis-à-vis owner or consultants.
• Abusive pricing of variations (‘captive market’).
• Financial difficulties.
• ‘Short-changing’ — materials that do not conform to specifications, production
short-cuts.
• Corruption.
• Poor communications.
• Failure of joint ventures, consortia, or other forms of association.
• Strikes and other labour unrest, caused by the contractor’s own failings or in
subcontractors’ or suppliers’ shops.
External Causes
• Natural phenomena usually associated with weather: rain, wind, flooding and
so on. Poor assembly or description of historical records in the bidding
documents, or poor provisions (e.g. for wet weather) by the contractor.
• Strikes: transportation (local and international), services (utilities).
• Utility failures: interruptions of power and water supply, disruption of
telecommunications.
• Political interference.
Other causes of disruption usually affect whole countries or regions (e.g. general
strikes, wars and revolutions) or are deemed ‘acts of God’, i.e. beyond human
control — such as earthquakes. The contract should refer to these and describe
how they will be dealt with.
The owner and the project manager should be concerned with a key question:
how have we provided for these types of problem in our contract, or in the terms
of our association with other consultants or contractors?
Ernesto Henriod
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The Causes of Contract Failure
199
In the previous chapters we have reviewed the latest developments in contract forms, and
the various methods of dispute prevention that have been introduced in the last decades.
We have also discussed the culture change that has been taking place in the construction
industry, tending to move away from an environment of confrontation, and realizing that
all parties tend to gain when working in a culture of good faith, collaboration and mutual
respect.
Nevertheless, much as the industry tries to enhance this refreshing, positive approach, we
will always have to contend with human failings and, whether we face a difficult Employer,
Engineer or Contractor nationally, or we decide to venture to do business internationally,
we may be faced with an issue that escalates beyond prevention measures such as the
contract neutral, or initial attempts at defusing — be they amicable settlement, negotiation,
mediation, or other form of alternative dispute resolution.
We may therefore have to engage in arbitration — the means for dispute resolution
included in most contract forms as the ‘end of the line’, the final recourse to settle an issue
which cannot be resolved by the parties to a contract by more expeditious and less
onerous means. In this chapter, three eminent specialists discuss alternative dispute
resolution and arbitration:
Ian Barker discusses dispute resolution in New Zealand today, and some issues of
international business;
Nael G Bunni presents his views about international arbitration, with particular reference
to the Construction Industry; and
David Williams writes about international commercial arbitration and international
conciliation.
Parts of these three important papers may repeat certain principles or concepts. Nevertheless,
we have decided to retain them as written by their authors, so that the reader will benefit
from the full development of the subject as visualized by each writer.
The reader’s attention is particularly called to Nael Bunni’s listing of activities under ‘Case
Management’ (page 223) and the voluminous amount of paper and preparation work suggested
prior to the start of arbitration proceedings. This exercise would lend credence to Martin
Barnes’ views on arbitration (see Chapter 6). Conversely, David Williams’ paper, when discussing
‘Multi-tiered Dispute Resolution’ (page 238) casts doubts on the usefulness of pre-arbitration
procedures such as normally grouped under the umbrella of ‘Alternative Dispute Resolution’:
DRBs, DABs, Adjudication, Mediation, and so on.
The jury is still out on the Barnes/Williams debate (see pages 88 and 238). You, the
readers, are the jury.
11 The Resolution ofDisputes
Ian Barker, Nael G Bunni & David Williams
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The Resolution of Disputes
201
Dispute Resolution in New Zealand today
Ian Barker
Introduction: Dispute Resolution Methods
The basic methods of dispute resolution are:
• negotiation;
• alternative dispute resolution;
• arbitration; and
• litigation.
Whole libraries have been written about all of these basic methods. In the course
of a chapter such as this, one can but touch on some of the advantages,
disadvantages and characteristics of each method.
In making the decision as to which method of dispute resolution to employ in any
conflict situation, the following considerations will feature in varying degrees of
prominence:
• cost;
• speed of resolution;
• confidentiality;
• best interests of the parties, including the impact on continuing
relationships;
• flexibility; and
• fairness and effectiveness.
Apart from the rationale behind the Construction Contracts Bill, construction
disputes seem rarely to have placed over-reliance on speed of resolution.
Negotiation
Negotiation is familiar to you all. We practise it in our daily life. In some cultures,
it is an indispensable part of living. Parties to a dispute can resolve it amongst
themselves, sometimes with and sometimes without the benefit of other
professionals. Human nature being what it is, it is not easy for negotiations to
occur fairly and with all parties being even marginally objective about the issues.
That is why parties frequently need the assistance of an impartial third party to
assist them to assess the reality of their positions. In negotiation, there is often
one party who proves to be the more aggressive or stronger, or who is perceived
to have more power over the other party.
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The Resolution of Disputes
Negotiation is private, speedy, cheap and can allow existing business relationships
to continue. It is not always easy to perceive it as objectively fair. Negotiating
styles, tailored to a particular occasion, are often as important in obtaining a
settlement as the negotiations themselves. Negotiation often takes place before
the merits of the dispute have been fully explored, which can be a disadvantage
and which can lead to attempts to re-open a dispute once relevant matters,
previously unknown, emerge.
Mediation and Other ADR Techniques
The drawbacks of negotiation have led to the modern popularity of mediation
and other ADR remedies. Mediation calls for the assistance of a mediator who is
a skilled and independent third party who manages the private negotiations
between parties and assists them towards a settlement. Parties have to agree to
mediate: the best result from a mediation is a signed, negotiated settlement.
Mediation styles vary: learned treatises have been written about mediation
techniques, many by American academics. I have never found these works
particularly helpful personally, although some mediators do. There are two main
styles of mediation: the first is when the mediator is a person skilled in bringing
parties together and in operating a process that ends in a settlement. The second
is where a mediator, perceived to have some idea of the legal and/or technical
subject matter of the dispute, may assist the parties towards a settlement by
offering reality checks and by opining, if asked, on how they might fare in arbitration
or litigation. Such a mediation normally requires comprehensive background
information being made available to the mediator. It is called ‘evaluative mediation’.
Most mediations of whatever style start with a public statement by each party
nominating concerns and stating what that party seeks from the mediation. This
is a helpful process because it enables the parties to ‘eyeball’ each other, often
for the first time. For example, it enables managing directors to find out what
their subordinates have really been doing in their company’s name. It can show
an insurance claims manager that a claimant is not a fraudulent person, but
actually quite a decent, reasonable one. Lawyers are helpful at a mediation in my
experience: I personally will not conduct one without them. Their role is not that
of an advocate to present evidence or to cross-examine, but to assist the parties
towards a settlement and, if necessary, to discuss issues with the mediator.
In many mediations, the mediator caucuses with each party separately, but may
not discuss anything told to him or her in confidence without the consent of the
other party. Often, such a mediator acts as an emissary to take offers and counter-
offers back and forth. In such a mediation, offers should not be made in open
session because of the ‘loss of face’ potential if an offer were not accepted.
Parties are advised against ridiculous offers: they should always try to assess
what effect any offer will have on the other side. Various people have various
needs at various times and, for some, one type of mediation might be suitable on
one occasion, and not on others.
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There are other forms of ADR, such as expert neutral determination, which can be
particularly useful in construction disputes. This is a hybrid between mediation
and arbitration, where the expert makes either a binding or non-binding settlement
recommendation to the parties on the basis of submissions presented. It is popular
in Australia but I have not heard of its great use here.
There is the ‘mini-trial’ where parties present, usually to a retired Judge or to a
barrister, statements of evidence and submissions. At the conclusion, the neutral
evaluator gives an idea of what the decision of a Court might be, based on the
evidence and submissions heard, but without cross-examination. This procedure
is favoured particularly in Canada but has not yet found much favour in New
Zealand, for reasons which escape me.
Mediation and other forms of ADR have the advantage of cost-saving. Most
mediations (even complicated ones) can be over in two or three days at the most.
Often a court case or arbitration over the same topic would take weeks. The cost
of the mediator is much less than that of an arbitrator who has to spend time
writing a reasoned award and closely studying the documents. Often the mediation
is held before lengthy preparations for litigation or arbitration are undertaken.
There is the obvious advantage of confidentiality because all parties and the
mediator agree to confidentially; both parties can have their say in a relaxed and
non-threatening forum. A good mediator does not allow a stronger party to exert
undue pressure on a weaker party. With mediation, there is always the prospect
of continuing business relationships and there is not the trauma often associated
with adversarial cross-examination during arbitration or litigation. There are no
rules of evidence at mediations. People can say what they really feel, either in the
open session or to the mediator. This ability can have a cathartic effect, which
often releases the willingness to settle, a sentiment that often has little opportunity
for expression in the structured realms of arbitration and litigation. In construction
disputes, mediation can be desirable because of its speed and efficiency. However,
more than in other types of dispute, there must be a real willingness to settle and
a disinclination to agree over minutiae, particularly of quantum. The ‘broad brush’
approach is called for.
Arbitration – General
Arbitration is a more formal dispute resolution process whereby the parties refer
their dispute to an independent, qualified third party for binding determination.
In effect, arbitration is a private Court case where the parties choose the ‘Judge’.
It can have the advantages of speed and the saving of expense. In my experience,
speed in arbitration can be sacrificed by the intent of some lawyers to run an
arbitration just as if it were a Court case, with all the panoply of pleadings,
discovery, pre-trial briefs, interlocutory applications, etc. Not all arbitrations have
to be like that and many construction arbitrations are not.
Arbitration can, however, be cheaper than litigation although, at first blush, this
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The Resolution of Disputes
proposition may not seem to be so. The arbitrator has to be paid, whereas the
Judge is provided by the State. (However, the latest recent increase of High Court
hearing fees to $2,200 per day is good news for arbitrators and mediators!). In an
arbitration, the parties have to pay for the venue and recording of evidence (if
needed). However, given the uncertainties of, and the delays in, obtaining Court
fixtures, the advantage of an arbitrator who knows the subject matter and in
whom the parties have confidence, is a definite advantage. The ability to choose
an early, fixed hearing date, without the uncertainty of Court dates, can make
arbitration cheaper in the long run, particularly if it can be brought on promptly,
given the saving in executive time. Moreover, the ultimately successful party is
not kept out of its money for as long as it might otherwise. There is a right of
appeal from an arbitrator’s decision but only on a point of law and only if either
of the parties agree in advance, or the Court gives leave. The Court of Appeal
decision in the Doug Hood case makes the instances of leave to appeal on a
point of law fairly rare. This is an affirmation of arbitration. The Courts take the
view that if the parties agree to arbitration, that is what they will get.
New Zealand is fortunate in having a new Arbitration Act, based on what are
known as the UNCITRAL rules. These rules were devised by a United Nations
Agency and are used by many countries throughout the world as a benchmark for
the conduct of both domestic and international arbitrations. The aim of the new
Act is to provide for the speedy, inexpensive and confidential determination of
disputes referred to arbitration. The arbitrator is given wide powers that can be
adopted or not adopted by the parties as they choose. These include the ability
to receive evidence that is not necessarily admissible in a Court and to act in
accordance with equity and good conscience on the perceived merits of the
dispute. There is also the ability to act in an inquisitorial fashion, something
which I note has now popped up in the new Employment Relations Act. This is
allegedly based on the European system of fact-finding. I have to say that many
lawyers in preparing arbitration agreements cross out this option in a ‘knee-jerk’
way, without bothering to think of the advantages it could give to the arbitrator.
Arbitrations can proceed similarly to a Court case with cross-examination: there is
room for innovation and expedition. There is the disadvantage in arbitration,
shared with litigation, of the ability for damaging statements to be made under
oath which may corrode the future relationships of the parties. Arbitration has the
advantage of confidentiality. I shall have something to say on the choice of
arbitrators at a later time in this chapter.
Arbitration – Domestic and International
There are two kinds of arbitration: domestic and international. I say no more
about domestic arbitration, with which you are probably familiar. I shall speak
about international arbitration. It may well be that those with whom a New Zealand
party is in conflict in a construction contract may be from another country. It is
usually better to resolve your dispute by way of arbitration with a party in another
jurisdiction than to litigate either in the New Zealand Courts or in Courts overseas.
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The reasons are fairly clear: first, an agreement to arbitration selects the forum,
thus avoiding problems of jurisdiction that are always present in litigation. If an
aggrieved party decides to litigate in the Courts in its own country, there is always
the potential for the defendant to dispute the jurisdiction. National courts vary as
to both the general competence and/or the experience of the judiciary in technical
topics. There can be ‘demarcation disputes’ between state and federal jurisdictions.
Some US states have elected Judges who have to run for re-election, whereas
Federal Judges are appointed for life. Even Australia has demarcation disputes,
admittedly now fewer as a result of special legislation. An international arbitration
can provide a neutral forum for adjudication not tied to the judicial or political
views of either party to the dispute. Under most modern national arbitration laws,
judicial intervention in the arbitral process is minimal. One should avoid a
jurisdiction that allows too much judicial interference.
Secondly, confidentiality (applicable to domestic arbitrations as well), specialised
competence, procedural flexibility and speed can apply to international arbitrations.
The third and greatest advantage of international arbitration lies in the enforceability
of awards. Under what is known as the New York Convention, arbitral awards are
easy to enforce worldwide, more easily than the judgments of national Courts.
The New York Convention, incorporated into the New Zealand Arbitration Act
1996, makes arbitral awards rendered in more than 100 convention states
enforceable in other convention states, such as New Zealand. There are only
limited defences against registration and enforceability.
There is no comparable worldwide treaty for the enforcement of court judgments.
Lawyers who have had occasion to use the Reciprocal Enforcement of Judgments
Act 1934 find it is not always easy to register New Zealand judgments, even in
similar jurisdictions to our own, such as Australia or the United Kingdom. It is
always very expensive. As for registering in countries not covered by that Act,
such as the United States, one might as well forget about it, particularly if the
judgment is to be sought to be registered in a State Court not particularly attracted
to foreign litigants. There is no comparable problem in enforcing international
arbitration awards. If there has been a competently-run arbitration, especially one
processed through an international arbitration centre, the chances of being unable
to register the resultant award are slim.
International arbitration can be either institutional or ad hoc. Institutional arbitration
means that the parties choose a particular institution, such as the International
Chamber of Commerce (ICC) in Paris, the London Court of International Arbitration
(LCIA), or the American Arbitration Association (AAA). There are numerous other
arbitration centres, for example in Hong Kong, Singapore, Kuala Lumpur, Melbourne
and Vancouver. These institutions fulfil various roles, including:
• assisting the parties in the constitution of the arbitral tribunal;
• having formal arbitration procedures that the centres supervise to varying extents;
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The Resolution of Disputes
• collecting the likely costs of the arbitration in advance;
• determining the arbitrators’ fees; and
• charging administrative fees for their services.
They do not adjudicate on the merits of the dispute, leaving that to the arbitrator.
The ICC by exception scrutinises awards before they are issued and makes
suggestions to the arbitrators based on the ICC’s knowledge of the file. This
procedure is supposed to instil confidence in ICC awards. New Zealand has only
recently become a full member of the ICC and, as such, has a member on the ICC
Court in Paris and a member on the ICC Arbitration Commission.
Obviously, an arbitration administered by an institution is going to cost more and
is likely to take longer because of the inevitable bureaucracy which helps to
resolve procedural difficulties and ensures that the finished product is satisfactory.
The costs of the arbitration are usually paid ‘up front’ to the institution and there
is thus no possibility when the arbitration award is released of one party being
unable to pay its share of the costs.
Litigation
The facility for litigation is provided by the State in accordance with its obligations
to provide citizens with a suitable forum for resolving their civil disputes. Legal
costs are always a factor when deciding to opt for litigation. In most mediations,
the mediator will invite counsel for both parties to submit a ‘best case’ and ‘worst
case’ scenario based on the likely costs of litigation and of possible appeals. The
legal costs of actually running litigation are about the same as that for arbitration,
if one excludes the cost of the arbitrator and the venue, etc. Litigation has a
certain right of appeal which arbitration does not have. Although there is some
limited judicial specialisation with the Commercial List in Auckland, you have to
take whatever Judge the system allocates to you. Courts operate under established
rules of evidence and within well-known guidelines. You cannot pick either your
Judge or the time of the court hearing in the same way as you can both pick the
arbitrator and arrange for a suitable hearing date for the arbitration.
Courts in New Zealand and in other similar jurisdictions have ‘improved their act’
considerably in recent years. The Woolf Reforms in England have obviously been
designed to make civil litigation in that country much more efficient and ‘user
friendly’, to coin an IT phrase. The Rules of Court in most jurisdictions, including
New Zealand, have been changed to avoid the ‘cards close to the chest’ syndrome,
which was a characteristic of so many advocates of yesteryear. Parties are
encouraged in the interests of obtaining a settlement as much as of saving court
time, to present their evidence in advance by means of prepared briefs. There are
Conferences at which Judges inquire whether the case is possible to settle: quite
frequently, strong hints are given to parties to try to mediate. There is not yet in
New Zealand a requirement that parties go to mediation against their wishes, as
exists in Victoria and Western Australia. My own view is that forcing people to
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mediation is not a good idea. A fairly firm judicial nudge can often be effective.
Mediation requires an effort of will on the part of all participants to want to settle
the dispute. Sometimes that effort is triggered by a judicial nudge.
Cases in Court usually do not enjoy confidentiality, although there are sensible
rules about preserving the confidentiality of sensitive business records or intellectual
property procedures. If the managing director is to be cross-examined
embarrassingly, then he will be cross-examined embarrassingly in a public forum.
On the contrary, if there were an arbitration about the same subject matter, the
world would not know of it.
Of course, if every case were mediated or arbitrated, the law would not grow on
its incremental case-by-case method as it has for centuries. There are still going
to be enough determined litigants to keep the courts busy, but I venture to think
that the diet of litigation will contain more regulatory proceedings, such as
Commerce Act proceedings or administrative law proceedings, or judicial review,
which are not particularly suitable for ADR. Construction cases usually reach the
Court by way of some remedy sought under the Arbitration Act (e.g. appeal,
removal of arbitrator). New Zealand does not have a specialised section of the
High Court dealing with construction cases as is the position in England and
Victoria. That is why arbitration is favoured. Most New Zealand Judges —  dismayed
at the prospect of what they perceive as days of boring evidence about quantities,
rates, etc — positively discourage this type of case and encourage ADR.
Summary
The above represents a scattergun statement of the dispute resolution options. I
have pointed out the advantages and disadvantages of these options. Obviously,
parties will be guided by their lawyers. Most lawyers are aware of mediation and
ADR as a tool in the resolution armoury. For a time there were lawyers who were
‘sniffy’ about mediation. Some of them, mistakenly, thought it was taking the
‘bread out of their mouths’: in my experience, that attitude has changed quite
perceptibly, even over the last two or three years. Smart counsel can see that
successful mediation of one case will mean that they can get on with the next
one.
Dispute Resolution Clauses
I now touch on something of great importance to dispute resolution. That is the
dispute resolution clauses in contracts. I do not think it useful to offer a selection
of these: however, I invite you or your lawyers, when concluding contracts, to pay
particular attention to the dispute resolution clause that you put in your contract.
I know that these clauses are usually found at the end of lengthy contracts after
there has been much argument about the principal terms. By the time the dispute
resolution clause is reached, the hard decisions have already been made and the
parties are looking forward to the obligatory bottle of champagne which symbolically
cements their deep and undying love and friendship.
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The Resolution of Disputes
However, when drafting the dispute resolution clause, lawyers should not just
take something out of the previous contract that happens, conveniently, to be
hidden in the bowels of the word processor. Nor should they be overawed by a
printed form clause used by a multinational or a professional organisation. However,
they should realise that these clauses have stood the test of time. May I say as an
aside that I still see arbitration clauses in contracts signed after 1 July 1997 which
refer to the Arbitration Act 1908. I still see arbitration clauses which talk about
two arbitrators and an umpire, a procedure which, apart from some long-term
leasing contracts, is no longer favoured by the 1996 Act.
General
I make the following points about dispute resolution clauses:
(a) Decide first whether you want a mediation as a prelude to arbitration. Many
contracts nowadays speak of parties ‘negotiating’ before starting the
arbitration procedure. I should have thought this provision unnecessary to
insert in a contract. As a matter of practical reality, people usually do negotiate
initially and proceed to arbitration or litigation as a last resort. Therefore,
one can normally assume that unless the parties are completely ‘daggers
drawn’, then attempts will be made to negotiate before the arbitration process
is triggered. Usually such clauses are fairly meaningless and can often be
unenforceable, coming within the ‘agreement to agree’ category. However,
their very existence can offer a chance to make delay to a temporising party.
(b) More important is a clause mandating mediation or conciliation as a
precondition for arbitration. Such terms need to be clearly worded and
should stipulate what sort of mediation is required, how a mediator will be
nominated and what the mediator is expected to do. There can be possible
enforcement difficulties if the clause is not sufficiently sharply defined and
is too much in the ‘let’s be jolly good chaps’ mode of legal prose which is
popular because of the ‘plain English’ mantra.
(c) I wonder whether it is a good idea to require mediation as a precondition to
arbitration. In my experience, most successful mediations of complicated
disputes are only successful because the issues have been defined by the
preliminary procedures of arbitration in litigation. In many cases, likely
evidence has indicated that the parties have an appreciation of their own
case and the case of the other side. Unless a ‘broad brush’ approach to
dispute resolution is favoured, mediation before the commencement of
litigation or arbitration can often be particularly unproductive because nobody
is too sure what the issues are.
What I have been trying to convey in this part of the chapter is that, whilst
dispute resolution clauses come in all shapes and sizes, it is essential that thought
be given when the contract is signed as to what is to happen if things go wrong.
Try and mandate the most cost-effective and efficient resolution process in the
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circumstances. Do not be overawed by the weight of some party if its standard
dispute resolution clause could end up causing you or your client a lot of
unnecessary expense. Practical examples from my recent experience:
(a) In one agreement between an IT provider and a customer, the provider’s
standard arbitration clauses were extremely convoluted. It required that,
whilst arbitration could take place in New Zealand, the contract was to be
governed by the laws of a certain State in the United States. It mandated
that the arbitrator be chosen by one appointing body for a dispute about a
service contract and by another appointing body for another type of contract.
(b) In another dispute which I encountered on the Bench, the case involved
property and companies in New Zealand. The solicitor for the New Zealand
party had agreed to a standard clause which stipulated that the contract
was to be governed by the laws of Japan — a quite impracticable situation
when the Court was dealing with property or companies in New Zealand.
(c) In an arbitration clause concerning a forestry contract the reference was to
three arbitrators “each of 10 years’ requisite experience”. The clause did not
say experience in what. There were several possibilities — forestry, law,
science, accounting, to name a few, since the dispute was very broad in its
scope.
I mention these instances to show that my concerns are not just imaginary.
Problems result often because negotiators and lawyers cease to be vigilant at the
end of the negotiation process. Do not be frightened to challenge printed terms.
If you have the main items agreed, the larger party with the standard form may
not wish to back off just because you would like some fine-tuning of the dispute
resolution clause.
Three Arbitrators or One?
Often, one party nominates an arbitrator and the other party, as a knee-jerk
reaction, rejects that arbitrator without any real consideration of whether that
person is suitable or not. The rejection is often merely because the nomination
comes from the other side.
Avoid clauses which require three arbitrators. Most arbitrations are suitable for a
single arbitrator, particularly now that a single arbitrator has power to appoint an
expert to advise him or her. (Article 26 of the First Schedule of the Act). One does
not get three Judges in a Court to hear even a very important witness at first
instance: three arbitrators may be necessary for a very important matter involving
much complexity or a lot of money, or both, in which case it is usual to have a
legal chairperson and at least one expert from the discipline concerned. But the
problem of the lack of technical knowledge of an arbitrator can be overcome by
having an expert appointed by the arbitrator.
When rather uncomplimentary things are occasionally said about ‘non-specialist’
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The Resolution of Disputes
Judges (sometimes in the construction industry), it should not be forgotten that
most senior barristers and Judges have had to acquire and absorb information on
a whole variety of topics over the course of their careers. If they are any good,
they have the ability to absorb technical information and retain it for so long as
necessary. For example, I would once have been able to give you a discourse on
the molecular structure of amoxycillin, a popular form of antibiotic – but that was
almost 20 years ago and I am afraid I have forgotten most of it! In that case, as
a Judge I had the equivalent of an expert appointed to assist an arbitrator. Under
the Rules regarding patent cases, I sat with a Professor of Organic Chemistry who
dealt with the daunting technicalities of stereo-chemistry.
Three-person arbitrations are usually more difficult to organise and to convene in
one place for a great length of time. Arbitrators are busy people, prominent in
their particular professions. There is also the expense of having to pay for three
instead of one. So, if you have an agreement which mandates three arbitrators,
do not follow it doggedly. Have one unless there are very good reasons for three.
Ideally, do not put in a requirement for three arbitrators unless you have a sound
reason for doing so.
Power of Appointment of Arbitrators
There can be situations where the clause in the contract between the parties
confers the power of appointment of an arbitrator to some designated person if
the parties cannot agree on an arbitrator. Often this is the president of a professional
body, such as the local or New Zealand Law Society, the Institute of Chartered
Accountants, the Institute of Professional Engineers or the Institute of Valuers.
Sometimes, the person currently occupying this role is well-qualified to nominate
a suitable arbitrator for the particular arbitration. Quite frequently, he or she is
not.
May I suggest that, for greater consistency when drafting such a clause, you
should make the nominator the President for the time being of the Institute of
Arbitrators and Mediators of New Zealand. Although I am currently the President,
I make no apology for so advertising the Institute. It has some 600 members,
both mediators and arbitrators. After suitable inquiry by the Institute, some members
are included on a panel of arbitrators or mediators whom the Institute can propose
to parties for selection.
The President of the Institute, when asked to make a nomination under a clause
in a contract, or the Institute CEO, when asked to supply lists of panel members,
will take into account the type of dispute before presenting names for consideration.
This way ensures that the parties to the dispute receive somebody suitably qualified,
not just in the subject matter, but also in the conduct of arbitrations or mediations.
Just because a person may be well-qualified in a discipline such as engineering or
valuation, that fact does not necessarily mean that that person is also experienced
in dispute resolution. Persons on the Institute’s list have normally passed
examinations on arbitration law and practice. The standards of the Institute are
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constantly being reviewed to ensure that suitable nominees are suggested to
inquirers.
Overseas Administering Body for International Arbitrations
If you are in an international contract situation, you have to decide carefully
whether you have an institutional arbitration or you have an ad hoc one. There
are the advantage of institutional arbitrations as mentioned, but none of these
institutions are wedded to any particular form. For example, you can stipulate
that an ICC arbitration be held in New Zealand, with the arbitrators to be appointed
from New Zealand. There are traps, particularly for New Zealand parties, in blindly
accepting an arbitration clause in a standard form contract — often prepared by
lawyers who have no understanding of New Zealand. I give you an example of
how this situation has acted detrimentally to local parties.
A dispute arose about some cargo which, when landed in New Zealand, was
defective. It caused considerable damage after it was unloaded. There was a
conflict between the shipper, the charterer and the owner. Under the standard
printed terms of the shipping documents, any dispute had to be resolved by
arbitration before a three-person maritime arbitration tribunal in London. There
were stringent time limits. The claimants were forced to go through this procedure
and incur the costs of appointing three maritime arbitrators in London within the
time limit. The hearing had to be in London: most witnesses were in New Zealand,
with a couple in Australia. The hearing was largely over quantum because it soon
became evident where liability lay. The matter was settled after a mediation. The
only alternative to settlement could have been the expensive course of flying all
the witnesses to London. If the parties had thought more about this particular
shipping contract instead of blindly following the form, they could have had an
arbitration in New Zealand or Australia (where the ship ended up), which would
have been far more efficient and less costly.
Likewise for ICC, LCIA, AAA arbitrations. In your contract, you can specify the seat
of arbitration; you can specify the language of the arbitration; you can specify the
pool from which the arbitrators can be drawn, even whilst accepting the
administration of one of these agencies. Other factors to consider include whether
you want a supervised arbitration, or the additional, but more costly, advantage
of the scrutiny given by the ICC. Do you think you can run it yourselves without
having to pay an organisation to run it? Do you have doubts about enforceability
if any award has not been scrutinised by an international appointing body?
Beware of the ‘colonial cringe’. Arbitrators and mediators in this part of the world
are just as competent as those elsewhere. In fact, New Zealand has been well-
regarded by the ICC and other international organisations, as is shown by
international conferences held in Auckland in recent years: first, the International
Convention of Maritime Arbitrators in March 1999; second, an ICC seminar in
March 1999 attended by ICC leaders; and third, a joint conference between the
New Zealand and Australian Arbitrators’ and Mediators’ Institutes in February 2000.
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The Resolution of Disputes
New Zealand can promote itself as a small and unthreatening nation where an
arbitrator is needed from a neutral country for an arbitration where the participants
are large multi-nationals from different, powerful countries. The Kiwi ‘let’s fix it –
let’s get on with it’ attitude is extremely helpful in this kind of situation.
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International Arbitration and the
Construction Industry
Nael G Bunni
Abstract1
From their beginning, the pioneering Conditions of Contract issued by FIDIC in 1957 provided
for arbitration as the ultimate method for dispute resolution in the contract between
employer and contractor. However, by the 1980s, the advantages of arbitration were
diminishing: costs were escalating and time taken to complete an arbitration case was
becoming excessive. Although not peculiar, in general, to construction disputes, this
disenchantment was more focused and felt in the construction field because of the extreme
complexity of construction disputology and its many unique features. Most construction
contracts, whether or not based on the FIDIC Forms, provide for arbitration as the ultimate
method of dispute resolution. This is mainly as a result of the 1958 New York Convention
on the Recognition and Enforcement of Foreign Arbitral Awards.
However, it is appropriate to concentrate here on the FIDIC Forms of Contract as most of
the construction in the international field use these, either unaltered or in an altered
format, and where dispute resolution is concerned they remain to a large extent unaltered.
Complaints about the excessive time and cost led the draftsmen of the Fourth Edition of
the Red Book of the FIDIC Standard Form of Contract to include in 1987 an intermediate
step between the dispute arising and the initiation of arbitration. This step, amicable
settlement, was made a mandatory step, which obliged the parties to attempt a settlement
of their dispute by methods other than arbitration, hopefully simpler, cheaper, quicker and
certainly friendlier.
The success of this move by FIDIC led other institutions to follow its example. It also led
the draftsmen of FIDIC to delve further into this field of disputology and to introduce into
the Orange Book, in 1995, the concept of a ‘Dispute Adjudication Board’ and later into the
Red Book, through a Supplement published in 1996. This development was welcomed by
all concerned and was recently adopted into three of the four Standard Forms of Contract
published by FIDIC in September 1999, namely: The New Red book, The New Yellow Book
and The Silver Book. The fourth form, The Green Book, included a special set of adjudication
rules to be applied in case of dispute followed by arbitration if either party is dissatisfied
with decision of the adjudicator.
On the practical end, ‘Case Management’ has been recently introduced in the field of
construction disputology by experienced and innovative construction arbitrators in order
to establish efficient and cost effective procedures.
1 Some material in this paper has been unavoidably and necessarily duplicated in a paper entitled “Notes and
Current Development — Recent Developments in Construction Disputology” , by Nael G Bunni, Journal of
International Arbitration, Vol. 17, No.4, August 2000.
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The Resolution of Disputes
Introduction: Fifty Years of Evolution
The spread of arbitration as a method of Dispute Resolution in international
construction projects may be traced back to the period between 1956 and 1958.
In August 1956, the obvious need for a standard form of contract for international
construction prompted the Association of Consulting Engineers in the United
Kingdom to publish the first edition of its Conditions of Contract for Overseas
Works Mainly of Civil Engineering Construction.2 It was based on the 1955 print of
the Fourth Edition of the ICE General Conditions of Contract and Forms of Tender,
Agreement and Bond for Use in Connection with Works of Civil Engineering
Construction,3 and became commonly known as the ‘ACE Form’.
In August 1957, FIDIC4 adopted the ACE Form and published its own first edition
of the “Conditions of Contract (International) for Works of Civil Engineering
Construction”. This was done with the co-operation of the Fédération Internationale
du Bâdtiment et des Travaux Publics (the International Federation of Building and
Public Works, now known as the International Construction Federation, FIEC). In
addition to some editing changes and a few minor revisions to a small number of
clauses, certain important modifications were made to the text of the ACE Form to
produce the first edition of the Red Book.5
Both the ACE and the FIDIC Forms provided for arbitration as the method of
dispute resolution under the contract, mainly because of the fear that in litigation
a dispute might end before the courts of at least two different jurisdictions, each
competing for supremacy. Such a process is usually protracted and often has
overlapping roles with consequential difficulties in the recognition and enforcement
of what would then be foreign judgments ending in most cases inconclusively.
However, the arbitration clause in both forms stipulated that no arbitration could
commence until after completion or alleged completion of the project. Therefore,
any dispute arising out of the construction contract, which could not be resolved
by negotiation between the parties, remained unresolved for the duration of the
construction period.
Then, in 1958, the New York Convention on the Recognition and Enforcement of
Foreign Arbitral Awards came into being.6 Arbitration immediately became the
2 The ACE Form was published jointly with the Export Group for the Construction Industries, and with the
approval of the Institution of Civil Engineers in the United Kingdom, for use outside the United Kingdom.  It
became commonly known as the Overseas (Civil) Conditions of Contract.
3 Although in text and format the ACE Form was based on the ICE Conditions, it differed slightly in some forty
clauses and had certain major alterations in a number of others. For details of these alterations, see Chapter 1
of The FIDIC Form of Contract - The Fourth Edition of the Red Book, by Nael G Bunni, Blackwell Science Ltd.,
Oxford, 2nd Edition, 1997.
4 FIDIC is the acronym for the “Fédération Internationale des Ingénieurs - Couseils” (International Federation of
Consulting Engineers).  It was originally founded in Ghent, Belgium in 1913 by the national associations of
consulting engineers of Belgium, France and Switzerland, but since then it has grown to represent associations
from nearly sixty countries around the world.
5 For details of these alterations, see Chapter 1 of The FIDIC Form of Contract - The Fourth Edition of the Red
Book, by Nael G Bunni, Blackwell Science Ltd., Oxford, 2nd Edition, 1997.
6 The 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards has been
ratified by over one hundred and twenty different jurisdictions worldwide.
215
preferred forum for dispute resolution in the international field and thus has been
influential in facilitating the creation of international construction projects, including
the necessary investment and economic measures required for such projects around
the world. Of course, this effect was not unique or confined to the construction
industry alone.7
The ACE Form was short lived as it was taken over by the FIDIC Form, which
became better known as The Red Book due to its long-winded title and the fact
that its cover was red. The success of the Red Book in the international construction
field led FIDIC, in 1963, to publish the Yellow Book, which was drafted for electrical
and mechanical works. The drafters of the Yellow Book also chose arbitration as
the ultimate method of dispute resolution and here again arbitration proceedings
could not be commenced until the project was substantially completed. Successive
editions of the Red and Yellow Books continued this trend until 1987 when the
Fourth Edition of the Red Book and the Third Edition of the Yellow Book allowed
the parties to commence arbitration during the construction period.
Over the years, the prominence of arbitration over litigation heightened. This was
exemplified by a number of authoritative statements such as: “No businessman
in his right mind seeks litigation.”8 However, by the 1980s arbitration began to
lose favour with the construction community, mainly due to excessive costs and
the time taken by arbitral proceedings. In response, the Fourth Edition of the Red
Book, when it was published in 1987, provided for amicable dispute resolution as
a mandatory first step prior to proceeding to arbitration.9
Only when disputes could not be resolved amicably within a 56-day period,
extendable by the parties, could the arbitration proceedings commence. FIDIC,
rightly, did not specify the type of amicable dispute resolution forum that should
be used because it believed that each construction dispute is unique and may
require a special treatment different from that used or adopted in another set of
circumstances.
Thus, “Amicable” may refer to any one of the following: Affordable, Available or
Appropriate, and includes mediation, conciliation, adjudication, expert evaluation
or mini trial.
The trend of moving away from arbitration, except in the more complex and
7 The 1958 New York Convention has been described as the “single most important pillar on which the
international arbitration edifice rests”; and “perhaps could lay claim to be the most effective instance of
international legislation in the entire history of commercial law”. It is reported that an estimated 98% of
awards in international arbitration are honoured or successfully enforced and that enforcement by national
courts has only been refused in less than 5% of cases, justifying the claim that it is far easier to enforce
arbitration awards than court judgments. See “Concord & Conflict in International Arbitration”, The Rt Hon Sir
Michael Kerr, The Keating Lecture, King’s College, London, October 1996, page 12.
8 Per Professor Sir Robert Jennings, Judge of the International Court of Justice at the Hague in his introduction to
the first edition of Law and Practice of International Commercial Arbitration by Redfern & Hunter, Sweet &
Maxwell, London, 1986.
9 The reasons behind that decision were explained in a paper by the author under the title of “Construction
Disputes on the Eve of the New Millennium” published in Arbitration, Vol. 65, No. 4, November 1999.
Nael G Bunni
216
The Resolution of Disputes
intransigent situations, continued in the field of construction up to the mid 1990s.
In 1995 FIDIC, following the example of the World Bank,10 included in its then
new Orange Book, the Dispute Adjudication Board procedure, as a first step in
the path of dispute resolution.11 This was followed, in 1996, by the introduction
of a Supplement to the Fourth Edition of the Red Book where the traditional role
of the Engineer acting as a quasi-arbitrator or adjudicator was abandoned and
replaced by a Dispute Adjudication Board.12 Thus what used to be referred to as
the two-tier system of dispute resolution has now become a five-tier process (if
one includes, as the first step, the presentation of a claim and, as the last step,
arbitration) and thus justifiably earns for itself the title of ‘disputology’. The path
to arbitration, under the 1996 Supplement and its timetable, is shown in Figure 1.
The principles relating to dispute settlement as provided for in the 1996 Supplement
to the Fourth Edition of the Red Book continue to be adopted by FIDIC in the first
three of its four new forms of contract, published in September 1999:
• The New Red Book — Conditions of Contract for Construction for Building and
Engineering Works designed by the Employer;
• The New Yellow Book — Conditions of Contract for Plant and Design-Build for
Electrical and Mechanical Plant, and for Building and Engineering Works, designed
by the Contractor;
• The Silver Book — Conditions of Contract for EPC Turnkey Projects; and
• The Green Book — Short Form of Contract, Agreement, General Conditions,
Rules for Adjudication and Notes for Guidance.
However, there are some subtle differences in the timing and duration of the
appointment of the members of the Dispute Adjudication Board in the above
forms of contract. For example, it is not envisaged under the New Yellow and the
Silver Books that the DAB members are appointed for the whole duration of the
project. This is an unfortunate change from the final Test Edition of these forms,
since some of the advantages of establishing a DAB on a construction project
would most likely disappear by the delay in its appointment.
It must also be noted here that the notice provisions for making a claim have
10 The World Bank published in January 1995 its Standard Bidding Documents for Procurement of Works financed
in whole or in part by the World Bank.  These documents were based on the fourth edition of FIDIC’s Red
Book, but with certain mandatory amendments, amongst which was the dispute resolution clause. The most
important of these mandatory changes was perhaps the introduction, in Clause 67 of the Conditions, of a
‘Dispute Review Board’, which replaced the adjudicator role of the Engineer for contracts estimated to cost
more than US$50 million.  (Editor’s Note:  the 1991 issue of the World Bank’s SBD for Procurement of Works
already included an option to include a Disputes Review Board in the Contract).
11 The Orange Book was drafted by FIDIC for projects where Conditions of Contract for Design-Build and Turnkey
had to be used.  This Form of Contract is now obsolete, as it has been replaced by the New Yellow Book
published in September 1999.
12 For a more detailed analysis of the decision to introduce the Supplement to the Fourth Edition of the Red
Book, see Chapter 21 of The FIDIC Form of Contract - The Fourth Edition of the Red Book, by Nael G Bunni,
Blackwell Science Ltd., Oxford, 2nd Edition, 1997.
217
been tightened considerably under the three new forms of contract. There is now
an over-riding requirement under Clause 20.1 of the Conditions for the Contractor
to give notice within 28 days, as follows:
“20.1 If the Contractor considers himself to be entitled to any
extension of the Time for Completion and/or any additional
payment, under any Clause of these Conditions or otherwise
in connection with the Contract, the Contractor shall give notice
to the Engineer describing the event or circumstance giving
Any dispute in respect of which:
(a) The DAB’s decision has not become final and binding; and
(b) Amicable settlement has not been reached, shall be settled, unless
otherwise stated in the contract, under the ICC Rules, prior to or
after completion of the Works. See Clause 67.4.
If notice of dissatisfaction is given under Clause 67.2, the parties shall
attempt to settle the dispute amicably before the commencement of
arbitration.  However, even if no attempt is made, arbitration may be
commenced after 56 days of the notice, see Clause 67.3.
If any party is dissatisfied with the decision of the DAB, it shall give
notice under Clause 67.2 setting out the matter in dispute and the
reasons for dissatisfaction.  If no notice of dissatisfaction is given, the
decision is final and binding.
The DAB shall give notice of its decision (reasoned) to the parties and
the Engineer, all of whom shall give effect forthwith to that decision
unless and until it is revised.
The dispute is referred in writing to the Dispute Adjudication Board,
“DAB” under Clause 67.1 of the Conditions.
The rejection is rejected; and a dispute now exists between the Employer
and the Contractor.
A claim is submitted to the Engineer and is rejected, in part or totally*.
* It must be noted that there are notice provisions with time limits throughout the Conditions
of contract to be complied with when either the Contractor or the Employer intends to make
a claim.  For further information on this requirement, see Chapter 16 of  The FIDIC Form of
Contract - The Fourth Edition of the Red Book, by Nael G Bunni, Blackwell Science Ltd.,
Oxford, 2nd Edition, 1997.
56
days
28
days
84
days
N
o 
pe
rio
d 
is
 g
iv
en
*
Figure 1: The path to arbitration, under Clause 67 of the 1996 Supplement to
the Fourth Edition of FIDIC’s Red Book
Nael G Bunni
218
The Resolution of Disputes
rise to the claim. This notice shall be given as soon as
practicable, and not later than 28 days after the Contractor
became aware, or should have become aware, of the event or
circumstance.”
Failure to give such notice within the specified period is fatal to the Contractor’s
claims for entitlement for time and money.
The DAB Procedure was not used in the New Green Book, presumably because it
is a short form of contract for minor works. Instead, the resolution of disputes is
based on adjudication as a first step followed by arbitration if either party is
dissatisfied with decision of the adjudicator.
A special set of ‘Rules for Adjudication’ was drafted for use in this process. These
Rules, which are based to a large extent on the English Statutory Adjudication,13
leave the choice to the parties as to whether the Adjudicator is appointed for the
whole duration of the contract or within 14 days within the reference of a dispute
by one party to the other.
Construction Contracts and Disputology
Construction contracts have many unique inherent characteristics, which distinguish
them from other types of contract. It is appropriate to reflect on these characteristics
before considering construction arbitration and its own features since they do
have a significant effect on how construction disputology has developed. A summary
of these characteristics is given below with reference material being suggested in
the notes for further reading on this topic.
• Except in a few specified circumstances, the contractor must complete the project,
irrespective of what happens and no matter what events take place during the
construction period, including accidents and other deterrents;14
• Construction projects require the expenditure of vast sums of money, frequently
provided by banks, financial institutions and insurance companies, which require
some form of guarantee as to the safety of the capital they provide for financing
the project.
• No two construction projects are alike, even when designed and constructed in
a similar manner, for a number of reasons. For example, as soon as a project is
relocated onto another site, a change in a number of factors and variables is
triggered, such as soil conditions, weather conditions, the type and condition
of adjoining properties, the type of the people involved, their language and
culture, and many other facets of a construction project or related to it.
13 Adjudication under the Housing Grants, Construction and Regeneration Act 1996 which came into force on 1
May 1998.
14 For a more detailed discussion of these circumstances which excuse the contractor from completing the
contract, see The FIDIC Form of Contract - The Fourth Edition of the Red Book, by Nael G Bunni, Blackwell
Science Ltd., Oxford, 2nd Edition, 1997, Chapter 13.
219
• The time required to plan, investigate, design, construct and complete a
construction project spans such a lengthy period which is often greater than
the period of cyclical recurrence of many of the natural hazards to which such
projects are exposed. This is known in statistical terms as the ‘return period’.
Whilst the effect of such natural hazards as earthquake, flood, storm, etc., is
insurable, the insurance cover does not extend to time loss and in the case of
‘Force Majeure’ the contract may be determined. Furthermore, if a reduction in
the period of construction is sought, a new matrix of risks is introduced.15
• Typically, construction programmes are complex involving hundreds, if not
thousands, of construction activities most of which have been priced by the
contractor at the lowest possible level, in order to win the contract. In general
terms, to complete an activity three types of resources will be needed: manpower,
materials and equipment. Reduction or miscalculation of any one of these
resources will cause delay or disruption in the planned programme, two effects
which lead to different results in terms of loss and compensation. Furthermore,
these activities interact with each other in such a way that in some cases an
activity cannot start until another is completed, in full or in part. Any delays in
such critical activities will cause all dependent activities to suffer similar delay
and can sometimes compound the delay. With the advancement of computer
technology, complex methods of planning and analysis of construction
programmes have been developed to help manage a project so that it is
completed on time and within budget. The most frequently used, and best
known technique, is Critical Path Network analysis (CPN). Whilst this technique
is a remarkable tool if used properly, it can easily be mishandled by the
uninitiated, especially if carried out in retrospect. This characteristic of construction
projects has resulted in the use of highly qualified technical experts to prepare,
evaluate and assess claims resulting from delay and disruption, which make up
some of the most expensive claims in the industry.
• Construction projects are susceptible to risk cultivation by the parties involved,
or by others associated with them, or advising them. The objectives of risk
cultivation serve to enhance the position of the party involved in such tactics.
• The personnel required to initiate, visualise, plan, finance, design, supply materials
and plant, construct, administer, supervise, commission and repair any defects
in a construction project is enormous. Such people usually come from different
social classes and, in international contracts, from different countries and cultures
with different languages. Those who are involved in international contracts
readily appreciate the immense problems that result from technical translation
from one language to another.
• The personnel involved come from numerous firms. Extensive interaction is
required between many of the firms involved in construction, including those
engaged as suppliers, manufacturers, sub-contractors and contractors, each
15 Nael G Bunni, Construction Insurance, Elsevier Applied Science Publishers, London, 1986, page 143.
Nael G Bunni
220
The Resolution of Disputes
with its own commitments and goals. These commitments and goals are not
always compatible with each other, hence resulting in conflict.
• A single cause of conflict in a construction project may affect a chain of contracts
between a number of parties joined in different contracts and subcontracts,
each of which has its own arbitration clause. This single cause may, therefore,
result in a number of disputes between a number of the parties, all involved in
the same project.16 For example, a collapse might be due to either defective
material or design or workmanship or manufacture with the employer, the
engineer, the contractor, the subcontractor and the manufacturer of a constituent
element, each accusing the other(s) and attempting to off-load the responsibility,
the resultant liability, and the blame for the fault. The most appropriate method
of resolving such disputes is by consolidating all of them into a single multi-
party arbitration. However, this is easier said than done, as no one has yet
come up with a satisfactory mechanism for such a multi-party procedure.
• Many construction projects are located in isolated regions with difficult terrain,
sometimes stretching over extensive areas, exposed to natural hazards of
unpredictable intensity, frequency and return period.
• The construction industry is a fast-developing and innovative industry. The
materials selected for use generally include a number of new products of unproven
performance or strength. Whilst advanced and complex technology is not only
desired, but also necessary in some construction projects, the result in most
cases is a higher risk.
Some of these innovations have evolved in the method or the process of dispute
resolution selected in the standard forms of contract. So, for example, as explained
above, amicable dispute resolution and DAB procedures have been added to the
traditional method of dispute resolution, resulting in a reduction in the number of
disputes proceeding to arbitration. However, this means that the disputes continuing
to arbitration are the complex and intricate disputes, which require real skill from
the arbitrator. It could also mean that these complex disputes do not surface until
the end of the project.17 Furthermore, the multiplicity of the steps in the dispute
resolution process has resulted in a number of complications peculiar to
construction disputes, for example the question of calculating the period that
applies to interest on money awarded in the arbitration. Figures 2 and 3 show the
possible starting points for such calculation in construction contracts as opposed
to another type of contract, such as, for example, a contract for sale.
As in other commercial activities, conflict arises in construction out of issues
relating to both fact and law. However, the nature of the issues that arise from
16 For example, but at one end of the spectrum, the Boston Central Artery Tunnel, a project under construction in
the United States at the present time, involving more than 120 separate construction packages.  Its construc-
tion is expected to span 14 years.
17 A recent article in The Dispute Review Board Foundation Forum, Volume 4, Issue 1 on the Boston Central Artery
Tunnel shows that whilst only 22 disputes have been formally presented to the project’s DRBs during the past
nine years, there is a backlog growth of 500 claims in the past year.
221
construction contracts is distinguishable in a number of ways. Firstly, in general
terms, they are founded, more often than not, on matters of fact. Secondly, in
construction, the factual issues can be, and usually are, multi-faceted. Radiating
from the actual occurrence which gives rise to loss, damage or injury, referred to
in construction terms as the ‘event’, to other aspects including technical, financial,
measurement and consequential issues, all of which must be addressed and
must be established or proven. Thirdly, issues of law in construction contracts can
be divided into two parts: those that relate to the general principles of the
applicable law of the contract between the parties, and others that relate to the
standard conditions of contract used, as explained in the following paragraph.
These three distinguishing factors lead, in almost all construction arbitration cases,
to the introduction of massive documentation supported by a large number of
witnesses of fact and expertise.
An important characteristic in nearly all construction projects is the use of standard
forms of contract, which superimpose specific legal principles onto the applicable
law of contract. They have developed into a specialised area of law and have
crossed national frontiers to form an international legal code agreed by the parties.
They have in fact been very successful in coping with any conflict of laws, which
may exist between the various legal systems involved.18 Experience has shown
The
Event
Notification
of Claim
1 2
Submission
of Claim
Rejection
of Claim
Dispute
notified
Submission
of Dispute to
Engineer or
DAB
3 4 5 6
AWARD
Decision of
Engineer or
DAB
Decision of
Engineer or
DAB is
challenged
Commence
Amicable
Dispute
Settlement
Failure to
resolve the
dispute
Notice of
Arbitration
7 8 9 10 11 12
Figure 2: Relevant target dates in a typical construction contract
for the calculation of interest.
The
Event
Submission
of Claim
Rejection
of Claim
Notice of
Arbitration AWARD
Figure 3: Relevant target dates in a typical contract for the
calculation of interest
18 There is a general call for a ‘Construction Lex Mercatoria’ by a number of eminent lawyers and construction
professionals as may be seen, for example, from the article “Moving Toward a Construction Lex Mercatoria: A
Lex Constructionis”, by Charles Molineaux, Journal of International Arbitration, 1997.
Nael G Bunni
222
The Resolution of Disputes
that a significant number of disputes in the construction field arise from the
application and interpretation of these special standard conditions of contract.
Therefore, it is essential to appreciate that there is, in construction, an additional
area of law to be mastered, which is continuously evolving and being refined to
meet the particular type of project envisaged by the owner, or promoter, and his
advisory team.19
International Construction Disputology and Arbitration
Because of the above unique and peculiar inherent characteristics of construction
contracts, the development in the science and art of disputology for the whole
spectrum of construction activities was inevitable. If it were to be successful, the
resolution of the complex and extensive construction disputes had to strive to be
at the forefront of advanced techniques in dispute resolution. Therefore, although
arbitration remains as the final step in dispute settlement, the path towards that
step now includes two other successful procedures, the Dispute Adjudication
Board and Amicable settlement, the latter mostly in the form of Mediation or
Conciliation.
The growth in the Dispute Adjudication Board or Dispute Review Board procedure
can be seen from figures recently published in Foundation Forum.20 These are
tabulated in Table 1. As mentioned earlier, the Dispute Adjudication Board is used
in the procedure adopted by FIDIC and the Dispute Review Board is used in the
procedure incorporated by the World Bank in their Standard Bidding Documents.
They differ in their detail, including their respective timetables, but with one
important exception are similar in principle, the exception being the temporary
binding nature of the decision of the DAB, as against the totally non-binding
effect of the recommendation of the DRB.
It is worth mentioning at this point that there are a number of similarities between
the procedure under the DRB, DAB, adjudication under FIDIC’s Green Book and
adjudication under the Housing Grants, Construction and Regeneration Act 1996
which came into force in the United Kingdom on 1st May 1998.21 The latter would
be particularly relevant to international contractors where the works are carried
out within the United Kingdom, even though the applicable law of the contract is
from a different jurisdiction. The relevant section of the Act to the rights of the
parties and the procedure to be followed is section 108, which gives any party to
a construction contract the right to refer a dispute arising under it for adjudication.
19 Foremost amongst these standard forms of contract are those published by FIDIC since 1957.  Recently, in
September 1999, FIDIC published new forms, which cover the whole spectrum of the construction industry and
are expected to be used alongside those already in existence.  Therefore, this area of the law will become
even more extensive than it is at the present.
20 The Dispute Review Board Foundation Forum, Volume 6, Issue 1, January 2002.
21 The definition of a construction contract under the Act is wide and includes an agreement to carry out
architectural, design and surveying work and to provide advice on building, engineering, interior and exterior
decoration and landscaping work.  By Section 106 it does not include a contract with a residential occupier, so
that a contract with a building owner for works to premises that he occupies or intends to occupy as his
residence will not be affected, although any sub-contract under such a contract will be.
223
The procedure for adjudication must comply with that section, which lays down
clearly-identified certain minimum provisions. If the adjudication provisions in
any construction contract do not comply with these requirements, the Scheme for
Construction Contracts produced by legislation will apply, referred to as ‘the
Scheme’.
Moving on to arbitration, one of the developments at the forefront of advanced
techniques in dispute resolution was the introduction of case management in the
arbitral process by experienced arbitrators in the field of construction.22 One
commentator expressed the need for management in this way: as in commercial
transactions, no businessman would dare attend a meeting without having ‘done
his/her homework’  so it is usual that anyone in this situation would have obtained
background papers and would have familiarised him/herself with the business in
hand. He concluded that it must follow that prior to any hearing or meeting, full
documents are expected to be supplied.23 Thus, case management involves the
introduction of a number of procedural steps, as appropriate, in order to give
effect to the desired outcome of proper preparation and, in turn, speed and
economy. It includes, amongst others, the following:24
Year Projects with
DRBs
Contract Value
US$billion
Disputes
settled
1988 19 1.4 16
1989
1990
1991 63 3.2 78
1992
1993
1994 166 9.7 211
1995
1996
1997 326 22.1 424
1998 477 28.8 596
1999 576 32.6 758
2000 666 35.4 869
2001 818 41.0 1021
Table 1: Contracts complete and under construction
22 See “Construction Disputes on the Eve of the New Millennium” published in Arbitration, Vol. 65, No. 4,
November 1999.
23 “Two Contributions to Debate”, a contribution by Brian R Simmons, Arbitration, Vol. 65, No. 2, May 1999.
24 Nael G Bunni, The FIDIC Form of Contract - The Fourth Edition of the Red Book, Blackwell Science Ltd., Oxford,
2nd Edition, 1997, Chapter 19 and in particular page 417 include most of these proposals.
Nael G Bunni
224
The Resolution of Disputes
• Holding case management conferences at the commencement of an arbitration
and at other specified stages of the case in order to plan and to monitor time
and cost.
• Identifying and separating the issues into categories and dealing with
predominant issues before others in the hope of promoting settlement prior to
the main hearing.
• Confining the evidence to the issues.
• Arranging for full written submissions covering both fact and law from both
parties, supported by all documents relied upon, properly referenced. Such
submissions would have three benefits:
— to impel the parties to have their case properly structured before coming to
the hearing;
— to enable the parties to know each other’s case before they get to the
hearing, so that there are no surprises and the strength or weakness of a
case can be evaluated before it is tested in full forum; and
— to enable the tribunal to understand the parties’ cases and focus the attention
during the hearing solely on the relevant areas.
• The submission in writing and exchange of all witness statements and experts’
reports in advance of any hearing, supported by documents relied upon. This is
a particularly important feature of cost-effective management since in the words
of an eminent author “(W)itness statements have a dual role:
— they require each party to disclose his full evidence, so that his opponent is
not taken by surprise. This is conducive to settlement and to enabling the
parties to prepare to address the real issues;
— they are intended (unless justice otherwise requires) to stand as evidence in
chief and accordingly save the time and cost of an examination in chief”.25
• Controlling the number of experts on the issues concerned, the time available
for cross-examination and giving consideration as to whether experts ought to:
— be examined by the experts of the other party or by the tribunal; and/or
— have joint meetings with arbitrator or, in the case of a tribunal, with the
chairman, without the presence of lawyers or at least if they were to be
present, then only as observers. This procedure would obviously be more
successful when the sole arbitrator or the chairman is an expert in the field
of the dispute. However, this procedure could also be entrusted to the whole
tribunal when one of the co-arbitrators is an expert in the issues discussed.
25 “Civil Litigation in the 21st Century”, The Chancery Bar Association Spring Lecture 1998, by the Hon Mr Justice
Lightman in Lincoln’s Inn on 3rd June 1998, published in Arbitration, Vol. 65, No. 1, February 1999.
225
• Ensuring that experts know that in giving evidence to the tribunal, they owe
their primary duty to the tribunal and not the parties and that their evidence
should be an objective, unbiased opinion of matters within their expertise.
• Applying a limited timetable to oral hearings with equal sharing of time between
the parties, provided that such limitation does not offend the rules of natural
justice, which require each party to be given a reasonable opportunity to present
evidence and argument and to test the case against him. It is suggested, however,
that as expressed by a prominent lawyer arbitrator, ‘reasonable opportunity’
should be considered in the following terms: “But there is no right to conduct
endless and exhaustive examination of witnesses, and there is considerable
scope for an arbitrator to adopt a firm approach in determining how far the
investigation of particular issues should be taken. In this regard, the arbitrator
may need to expressly address the question of what is ‘reasonable opportunity’,
and if necessary hear the parties on the question. It is most unlikely that the
court would seek to impose any different view.”26
• In preparation for the hearings, the production of a joint and agreed bundle of
documents, chronologically paginated, and in complex and large disputes, a
much smaller core bundle.
• At the hearing, taking written statements as evidence in chief and proceeding
directly to cross examination, in between short opening and closing statements
from both parties, which would then be supplemented by written post-hearing
submissions.
• Contemplating what, if any, other specific requirement peculiar to the particular
project or dispute exist as these may vary widely.
It is suggested, that in devising his management framework, the arbitrator should
be aware of the underlying forces which exist in the particular circumstances of
the case and consider, amongst others, the following questions or matters:
• Is the virtue of speed of dispute resolution an aspiration of all the parties
involved? With conflicting objectives, even the procedure becomes a disputed
matter. As discussed above, there are many other examples that make
construction arbitration such a complex topic to deal with.
• Have the parties placed a cost restraint on their lawyers?
• Would party autonomy affect the influence, which the parties’ legal representatives
could have on the arbitration procedure to be adopted?
• Are the expert witnesses employed by the parties independent? Some expert
witnesses perform their role without paying any attention to the fact that “their
evidence should be, and should be seen to be, the independent product of the
26 “Cost-effective arbitration”, by John Uff QC, Arbitration, Vol. 59, No. 1, February 1993, page 33.
Nael G Bunni
226
The Resolution of Disputes
expert, uninfluenced as to form and content by the exigencies of litigation. To
the extent that it is not, the evidence is likely to be not only incorrect, but self
defeating.”27
Some legal representatives, presumably to impress their clients, adopt, at their
client’s expense, aggressive and perverse attitudes, often in a hostile manner
and, in particular, in the form of feverish correspondence accompanied by
compulsive use of the photocopying machine.28
Methods of Dispute Settlement under the FIDIC Forms
A summary of the position regarding the methods of dispute settlement under
the various FIDIC Forms of Contract is set out in Table 2.
Concluding Remarks: what will the future hold?
Although arbitration remains the ultimate method of dispute settlement in
international construction contracts, two additional methods have been introduced
before arbitration can be initiated. The first method is through the appointment
of a Dispute Adjudication Board and the second is by Amicable Dispute Settlement.
These are mandatory methods and whilst they are expected to reduce the number
of references to arbitration there will be no alternative to arbitration for many
complex and intriguing disputes. This is mainly due to the adoption of the 1958
New York Convention on the Recognition and Enforcement of Foreign Arbitral
Awards, ratified by over one hundred and twenty jurisdictions worldwide.
Construction contracts produce a second layer of legal principles through their
standard forms of contract, which are superimposed on the applicable law of the
contract between the parties involved. These conditions have developed into a
specialised area of the law and have crossed national frontiers to form an
international legal code for construction activities. They have been very successful
in coping with any conflict of laws, which may have existed between the various
legal systems involved. The effect of these standard forms of contract is the
recent call for a ‘Construction Lex Mercatoria’  by a number of eminent lawyers
and construction professionals.
It will be difficult and unhelpful for anyone to be involved in the resolution of
disputes arising from such construction contracts unless he or she is very familiar,
if not expert, in the areas of these forms and the disputology incorporated in
them.
Thus, international construction disputes reaching the arbitration stage will require
even more highly skilled arbitrators than before, educated in the field of the
27 Whitehouse v. Jordan [1981] 1 All ER 267, 276B, per Lord Wilberforce.
28 In England, in a recent judgment of the Court of Appeal in Vernon v. Bosley [1997] 3WLR 683 the duty of the
advocate to the court was extended to include doing all in his power to facilitate the economic and expedi-
tious administration of justice.
227
1
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d.
Table 2: Methods of dispute settlement under the various
FIDIC Forms of Contract
Nael G Bunni
228
The Resolution of Disputes
peculiar inherent characteristics of construction disputology and trained to manage
the arbitral process effectively in all aspects, but particularly in respect of time
and cost without sacrificing fairness and justice.
To be able to deal with dispute resolution effectively, one must understand the
principles that lie behind such dispute resolution mechanisms and be familiar,
not only with their operation, but also with their objectives and their limitations.
The development of specially-designed arbitration guidelines and rules for
international construction arbitration would be of enormous value in this field, a
task which has already begun and some results can be expected in the immediate
future.29
It is not beyond expectation that ‘Disputology’ could become a recognised topic
for the art and science of dispute resolution. One can also foresee the possibility
of the establishment of a new International Court for resolving disputes on the
enforceability and/or challenge of arbitral awards promoted through a convention
similar to the 1958 New York Convention. Such a court would remove some of the
unhappy experiences in construction arbitrations.30
29 There are a number of initiatives aiming to produce a special set of guidelines for the construction industry.  In
France, the International Chamber of Commerce has established a working group to investigate the adaptation
of their rules to specific areas of dispute including construction. In England, rules along the lines of The
Construction Industry Model Arbitration Rules, ‘CIMAR’, or the ICE Arbitration Procedure, but for international
construction, are awaited.
30 “Concord and Conflict in International Arbitration”, The Keating Lecture in memory of Donald Keating, by the Rt
Hon Sir Michael Kerr, Kings College, London, 1996, page 29.
229
Resolving Contract Disputes: International
Commercial Arbitration and International
Conciliation
David Williams QC
The Growth of International Commercial Arbitration
Over the past 30 years, international commercial arbitration has been transformed
and institutionalised as the primary method for the resolution of transnational
commercial disputes, including construction.1
The ascendancy of arbitration over national court litigation can be seen in the
way that high profile international construction disputes have increasingly been
submitted by agreement of the parties to international arbitral panels. Under the
principle of party autonomy, National Courts have strongly supported this choice
and refused to let any party later change its mind and go to the Courts for
substantive relief: for a leading example in the construction field, see Channel
Tunnel Group v Balfour Beatty Construction Ltd [1993] AC 334; [1993] 1 ALL ER
664.
The prevalence of international arbitration is also evident in the tremendous
growth since the late 1970s in the number of international arbitration centres and
the gradual acceptance of uniform procedural arbitration laws in many countries,
based on the UNCITRAL Model Law. International commercial arbitration therefore
represents an international dispute resolution device of immense practical
importance.2
Reasons for Choosing Arbitration for International Commercial Disputes
including Construction Industry Disputes
When businesses enter into transnational relationships, such as contracts for the
sale of goods, joint ventures, construction projects, or distributorships, they must
determine whether arbitration, or litigation before national courts, is the most
appropriate means of resolving any disputes. Typically the contract will call for
arbitration in the event of any dispute. Several reasons lie behind this choice.
Neutrality / Certainty
An agreement to arbitrate is a forum selection agreement that avoids problems of
jurisdiction. Without a forum selection agreement, a dispute between parties
1 For further discussion see: Dezalay and Garth, “Merchants of Law as Moral Entrepreneurs: Constructing
International Justice from the Competition for Transnational Business” (1995) 29 Law and Society Review 27
and Wetter, “The Internationalisation of International Arbitration: Looking Ahead to the Next Ten Years” (1995)
11 Arbitration International 117.
2 For further discussion see generally Lowenfeld, International Litigation and Arbitration, (1993) pp 331-367.
230
The Resolution of Disputes
from different countries involves the unattractive prospect of the aggrieved party
having to litigate in the Courts where the other party is established. Even if the
aggrieved party decides to litigate in the Courts in its own country there is always
the potential for the defendant to dispute jurisdiction. A national court may decline
to hear a case if it finds, among other things, that it lacks subject matter or
personal jurisdiction, that it is not a convenient forum, or that hearing the case
would contravene the doctrines of sovereign immunity or act of state.
However, even if the arbitration is to be held in the country where one party is
established, an agreement to arbitrate is an agreement on a neutral forum, not
tied to the judicial or political structure of either party. This is perhaps the main
reason given today for choice of arbitration in the international sphere. It allows
each party to avoid being forced to submit their dispute to the Courts of the
other. Moreover, under most modern national arbitration laws, the extent of judicial
intervention in the arbitral process will be minimal.
Indeed, with the International Centre for the Settlement of Investment Disputes
(ICSID) arbitration system established under the 1965 Washington Convention
under the auspices of the World Bank, this separation between the arbitration
system and state courts is almost complete.
As noted below, ICSID is a supranational arbitration system driven by the need to
encourage investors to invest in developing countries and remove for them concerns
about litigation against the contracting state in the Courts of the host State. Even
semi-administered arbitration, such as that of the International Chamber of
Commerce (ICC) in Paris, seeks to minimise the level of interference in the arbitral
process. The ICC exclusion of appeals provision, upheld in the New Zealand case
of CBI NZ Ltd v Badger Chiyoda, [1989] 2 NZLR 669 (discussed below), is a prime
example.
Enforceability of Arbitral Awards
As a result of the 1958 New York Convention on the Recognition and Enforcement
of Arbitral Awards (‘the New York Convention’), arbitral awards are easy to enforce
— much easier worldwide than judgments of Courts. The New York Convention
makes arbitral awards rendered in Convention States, of which there are well over
100, enforceable in all other Convention States on the same basis as domestic
arbitral awards, subject to very limited defences. There is no worldwide treaty
network for enforcement of Court judgments comparable to the New York
Convention with respect to arbitral awards, although The Hague Conference on
Private International Law is currently preparing a draft Convention on International
Jurisdiction and Foreign Judgments. Whether this effort will come to anything
remains to be seen.
Waiver of Sovereign Immunity
Private parties have become increasingly conscious of the special problems of
litigating against governments. Provision in an agreement with a State entity to
231
arbitrate future disputes avoids the problems of sovereign immunity.  An agreement
on commercial arbitration is a waiver of sovereign immunity.3
Confidentiality
In arbitration, unlike litigation, both the proceedings and the award generally
remain confidential, thus protecting sensitive or proprietary information from
disclosure and thereby facilitating settlement. However, parties to an international
arbitration agreement should not assume that their arbitration will automatically
remain confidential. There are two reasons for this reservation. First, the laws of
some countries do not provide for confidentiality of arbitral evidence (for the
Australian position see Esso Australia Resources Ltd v Plowman (1995) 128 ALR
391, noted by Williams & Thorp [1996] NZ Law Review 101). Secondly, not all
international arbitration rules expressly provide for confidentiality. Thirdly, the
few national laws which deal with confidentiality, e.g. s 14 of the New Zealand
Arbitration Act 1996, limit confidential treatment to the deliberations of the tribunal
and/or to the arbitral award.
Specialised Competence
A national judge may lack expertise in the particular subject matter of the dispute
or in international commerce generally. In arbitration, the parties may choose
arbitrators with expertise in particular areas or international matters, thereby
saving time and maximising the prospect of an acceptable decision.
Procedural Flexibility
National court procedures are fixed by local rules, and may include time-consuming
procedures — most notably, pre-trial discovery — which may be unnecessary or
inappropriate for the resolution of particular disputes. The procedure in arbitration,
including the amount of discovery, organisation of hearings and submission of
evidence and arguments, is left largely to the agreement of the parties and discretion
of the arbitrators, provided that a relatively relaxed standard of due process is
met.
Speed
Arbitration is usually quicker than litigation especially in comparison with the
crowded court calendars in all the world’s major commercial centres. A complex
commercial arbitration will usually be resolved in two to three years.
Cost
Arbitration is not necessarily cheaper than litigation as the parties must pay the
fees and expenses of the arbitrators (and of the administering arbitral institution),
as well as hire rooms for meetings and hearings.
3 See Delaume, “Judicial Decisions Related to Sovereign Immunity and Transnational Arbitration” (1987) Foreign
Investment Law Journal 403.
David Williams
232
The Resolution of Disputes
Ad Hoc versus Institutional Arbitration
International construction arbitration can be either ‘institutional’ or ‘ad hoc’.
Institutional arbitration is arbitration conducted in accordance with the procedural
rules of a particular arbitral institution, the most well-known of which are the
International Chamber of Commerce, Paris (ICC), the American Arbitration Association
(AAA) and the London Court of International Arbitration (LCIA). In the Asia-Pacific
region, the Hong Kong International Arbitration Centre, the Singapore International
Arbitration Centre and the China International Economic and Trade Arbitration
Commission (CIETAC) provide similar services. Typically, these institutions assist
the parties in the constitution of the arbitral tribunal, supervise (to varying extents)
the application of the institution’s arbitration procedures, determine the arbitrators’
fees and charge administrative fees for their services. The institutions themselves
do not adjudicate the merits of the parties’ dispute, leaving that task to the
arbitrators appointed in each case.
Ad hoc arbitration is not conducted under the auspices of an arbitral institution.
Instead, parties simply select arbitrators to resolve their disputes without
institutional intervention. The parties may either draw up their own rules of
procedure, select a pre-existing set of arbitration rules — the most prominent of
which are those promulgated by the United Nations Commission on International
Trade Law (the ‘UNCITRAL rules’) — or allow the arbitrators to independently
formulate procedural rules.
The primary factors to be considered when deciding between institutional and ad
hoc arbitration include:
• Predictability versus Flexibility. Both institutional rules and the UNCITRAL Rules
are time- and practice-tested rules, which provide for many of the procedural
issues likely to arise during arbitration. Drafting special ad hoc rules, by contrast,
is an expensive and time-consuming process, which can lead to unpredictable
results. On the other hand, special ad hoc rules may be appropriate to meet the
particular wishes of the parties and circumstances of the case.
• Procedural Matters. In institutional arbitration, the institution is available to
provide assistance in resolving procedural difficulties, especially with respect to
the constitution of the tribunal, which may arise during the course of the
proceedings. In ad hoc arbitration, by contrast, the parties’ only recourse other
than to the arbitral tribunal (if it has been constituted and if it is willing to
resolve the difficulty) is to the national courts at the place of arbitration, in
which event certain benefits of arbitration (such as confidentiality) may be lost.
• Administrative Matters. In institutional arbitration, the institution will determine
certain administrative matters (such as the fees and expenses of arbitrators and
enforcement of time-limits) that might otherwise be quite awkward for the
parties to resolve with the arbitrators. In ad hoc arbitration, those matters will
have to be handled by the arbitrators and the parties.
233
• Institutional Stature. In institutional arbitration, the institution lends its standing
to the arbitrators’ procedural rulings (including the decision to proceed
notwithstanding default by a party) and award, enhancing the likelihood of
voluntary compliance with or judicial enforcement of both. Ad hoc arbitration,
by contrast, depends largely for its effectiveness on co-operation between the
parties, backed up by an adequate legal system in the place of arbitration.
• Cost. Institutional arbitration is often believed to be more expensive than ad
hoc arbitration, especially where the amounts at issue are large and the arbitrators’
fees and institution’s administrative expenses are calculated as a percentage of
the amounts in dispute. The calculation of arbitrators’ fees and administrative
expenses on such an ad valorem basis, however, frequently results in lower
arbitrators’ fees than those calculated on the basis of time spent and tends to
discourage parties from asserting inflated claims for damages.
• Delay. Delay inevitably results from the need to process certain steps in the
arbitral proceedings through the bureaucratic machinery of the arbitral institution.
In ad hoc arbitration, on the other hand, delay may result from the absence of
an institutional mechanism to resolve procedural difficulties, especially those
that arise before the constitution of the arbitral tribunal.
Many experienced international practitioners find that the balance of factors favours
institutional over ad hoc arbitration, primarily because institutional arbitration
provides added predictability and security, and reduces the prospects for resort
to national courts as to procedural matters. Ad hoc arbitration pursuant to the
UNCITRAL Rules is, however, becoming increasingly popular, and may be especially
attractive where the amounts at stake are high and the parties and their counsel
are sufficiently experienced in international arbitration to forego the services and
added security provided by arbitral institutions.
Distinguishing Features of the Main Institutional Rules
The ICC Rules: ‘Supervised’ Arbitration
The ICC Rules were promulgated by the International Chamber of Commerce in
furtherance of its purpose to promote international commerce worldwide. Users
of ICC arbitration have recourse to it either by a special agreement submitting
specific issues to arbitration or by an arbitration clause in a contract. Hence ICC
arbitration flows from private law agreements. Its utility depends on support and
enforcement by national laws, especially statutes enacting the New York Convention
of 1958.4
Under the ICC Rules, the ICC’s International Court of Arbitration (the ‘ICC Court’, an
assembly of over 50 prominent figures in international arbitration) appoints the
4 For further discussion see generally, Craig, Park & Paulsson, International Chamber of Commerce Arbitration
(ICC Publishing Inc, 3rd ed 2000, Craig, “International Ambition and National Restraints in Arbitration” (1958) 1
Arbitration International 49 and the judgments in Bank Mellat v Helliniki Techniki SA [1984] QB 291.
David Williams
234
The Resolution of Disputes
arbitral tribunal, usually consisting of two party-nominated arbitrators and a
chairperson, and supervises the tribunal’s subsequent conduct of the arbitral
proceedings. For instance it advises on the terms of reference which define the
issues to be arbitrated, hears applications for replacement of arbitrators on the
grounds of prejudice, bias, incompetence or non-performance, and scrutinises
awards with a view to assuring their enforceability.
Three features in particular distinguish ICC arbitration from other forms of
institutional arbitration. First, the ICC Court does not directly appoint the chairperson
or sole arbitrator of the tribunal, but instead requests the appropriate National
Committee (determined in light of the place of arbitration, the governing law and
other factors) to propose an arbitrator for the ICC Court’s confirmation, thereby
tapping into a large international pool of experienced arbitrators. Second, the
arbitral tribunal’s first duty under the ICC Rules is to compose a document defining
its terms of reference, from which it may deviate during the ensuing proceedings
only by means of a rider signed by both parties. Finally, an ICC tribunal must
submit its award in draft form to the ICC Court which may require the tribunal to
make changes in the form of the award designed to enhance its enforceability
and make suggestions to the tribunal as to the substance of the award.
ICC arbitration remains the most widely-used form of international arbitration. It
is initiated by a request for arbitration in which the claimant identifies itself and
provides information on the dispute, the relief sought and any relevant agreement
it may have made on arbitration. In 2000, 541 requests for arbitration were
registered by the ICC Court, representing an increase of 2% on the previous year.
This brought the number of cases in progress at the end of the year to over 1,000
and the total number of cases handled in the history of ICC arbitration to 11,362.
However, its salient features are subject to occasional debate as to their relative
benefits and drawbacks. It is fair to say, however, that the international stature of
the ICC coupled with the degree of supervision exercised by the ICC Court accord
special credibility, and hence enhanced enforceability, to awards rendered under
the ICC Rules. In cases involving a state or state enterprise, which comprise a
significant portion of the ICC Court’s caseload, that stature and supervision may
be particularly important to the enforceability of the awards rendered.
The LCIA and AAA Rules: ‘Administered’ Arbitration
The LCIA Arbitration Rules 1998, the AAA’s International Arbitration Rules 1997
and the SIAC, HKIAC, and CIETAC rules are excellent examples of institutional
arbitration rules. Under these sets of rules, the institutions’ primary roles are in
the constitution of the tribunal (and determination of challenges to arbitrators),
after which the arbitral proceedings are treated in greater detail than in the ICC
Rules, but with significantly less intervention by the institutions.
The UNCITRAL Rules: Ad Hoc Arbitration
The UNCITRAL Rules were developed in 1976 by the United Nations Commission
235
for International Trade Law. It should be noted that the UNCITRAL Rules are
distinct from the UNCITRAL Model Law, although the Model Law was partially
based on the Rules. The Rules have become increasingly popular due largely to
their good track record as the basis for the rules used by the Iran-United States
Claims Tribunal. In substance, the UNCITRAL Rules are quite similar to the LCIA
and AAA Rules (both of which were patterned to some extent on the UNCITRAL
Rules), although parties to an UNCITRAL arbitration agreement should choose an
appointing authority to perform the principal functions otherwise performed by
the administering institution. Several arbitral institutions, including the ICC are
available to serve as appointing authority under the UNCITRAL Rules.5
New Zealand Cases
Although New Zealand is a small country, it has become involved in the advancement
of international commercial arbitration. First, in its Arbitration Act 1996, which
introduces into New Zealand law the UNCITRAL Model Law for international
commercial arbitration. Secondly, in its case law, as evidenced in Attorney General
v Mobil Oil NZ Ltd [1989] 2 NZLR 649 and CBI NZ Ltd v Badger Chiyoda [1989] 2
NZLR 669. Both cases arose out of industrial construction projects and represent
a vindication of the concept of party autonomy which has become central to the
advancement of arbitration as a dispute resolution process both domestically
and internationally. In Coppee-Lavalin SA/NV v Ken-Ren Chemicals and Fertilisers
Ltd (In liq) [1994] 2 All ER 449, Lord Mustill recently stated the principle as follows
(at 458):
“... ‘party autonomy’ ... emphasises that arbitration is a consensual
process, and that national courts should within very broad limits
recognise and give effect to any agreement between the parties,
express or tacit, as to the way in which the arbitration should be
conducted. This is now widely recognised as a first principle of
arbitration law, and the English Courts in common with those of
other nations with developed systems of arbitration law strive to
give effect to it.”
Attorney General v Mobil Oil NZ Ltd
The background to this case was that in 1979 the New Zealand Legislature enacted
the Arbitration (International Investment Disputes) Act. It implemented in domestic
law the 1965 Washington Convention on the Settlement of Investment Disputes
between States and Nationals of Other States (ICSID), to which the Government
of New Zealand had become a party.
In 1982, the New Zealand Government concluded contracts with the Mobil Oil
5 For further discussion on the experience of the Iran-United States Claims Tribunal with the UNCITRAL Rules, see
Baker and Davis, The UNCITRAL Arbitration Rules in Practice: The Experience of the Iran-United States Claims
Tribunal (Kluwer, 1992) and van Hof, Commentary on the UNCITRAL Arbitration Rule: The Application by the
Iran-United States Claims Tribunal (Kluwer, 1991).
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The Resolution of Disputes
Corporation and several of its subsidiaries, relating to the Motonui Synfuels project
for the conversion of natural gas into synthetic gasoline. The parties entered into
a participation agreement which included a provision that created in favour of
one of Mobil’s local subsidiaries certain preferential off-take rights to the synthetic
gasoline. Pursuant to article VII of the Agreement, the parties agreed any dispute
under the Agreement was to be submitted for resolution to arbitration under the
auspices of ICSID.
In May 1986, the Commerce Act 1986 was enacted, the object of which was to
promote competition in markets within New Zealand. The Act prohibited, with
retroactive effect, contracts, arrangements or understandings which substantially
lessen competition. At the end of 1986, the Crown wrote to Mobil informing it the
off-take rights provision was considered to contravene the Commerce Act and
that consequently the Crown would not give effect to the clause from 1 March
1987, the date on which the relevant Commerce Act provisions were to come into
force. After several attempts to resolve the resultant dispute had failed, Mobil and
two of its subsidiaries submitted to ICSID a request for arbitration which was
registered by the Secretary-General of ICSID on 15 April 1987.
The Crown objected to the jurisdiction of ICSID and, in May 1987, commenced
interim injunction proceedings in the High Court to restrain Mobil from referring
the dispute to ICSID or from continuing with any such reference. The Crown
contended that the issue as to whether the clause in the Participation Agreement
contravened the provisions of the Commerce Act should be decided in the Courts
of New Zealand. Mobil filed an application for stay of proceedings in the High
Court of New Zealand on the basis of s 8(1) of the 1979 Act which provides:
“If any party to proceedings pursuant to the Convention (or any
person claiming through or under him) commences any legal
proceedings in any Court against any other party to the proceedings
pursuant to the Convention (or any person claiming through or under
him) in respect of any matter to which the proceedings pursuant to
the Convention relate, any party to the legal proceedings; and the
Court may, if satisfied that there is no sufficient reason why the
matter should not be dealt with under the Convention, make an
order staying the legal proceedings.”
Heron J found that the requirements of the Act were met and ordered a stay of all
proceedings before the High Court until the Arbitral Tribunal, to be constituted
according to ICSID Rules and Regulations, had determined its jurisdiction.
Subsequently the Crown elected not to appeal and eventually formally accepted
the jurisdiction of the ICSID Tribunal. The arbitration hearings took place in 1988
and 1989 at the World Bank in Washington DC and a lengthy award on liability in
favour of Mobil was delivered in March 1989.
CBI NZ Ltd. v Badger Chiyoda
The Badger case, a construction case, is another example. The arbitration arose
237
out of the Marsden Point Oil Refinery expansion construction contract. It was an
international commercial arbitration. The multi-national parties to the contract
had agreed all disputes in connection with the contract should be settled by
arbitration in New Zealand under the Rules of Conciliation and Arbitration of the
ICC. Both parties further agreed their contract should be construed in accordance
with New Zealand law, and it was accepted New Zealand law governed the arbitration
proceedings. The case involved an application by CBI to set aside an award of Sir
Graham Speight, sitting as an arbitrator, on the ground that there were errors of
law on the face of the award. The crucial provision of the ICC Rules then in force
so far as the Badger case was concerned was article 24. It was in the following
terms:
“Finality and enforceability of award
1. The arbitral award shall be final.
2. By submitting the dispute to arbitration by the International
Chamber of Commerce, the parties shall be deemed to have
undertaken to carry out the resulting award without delay and
to have waived their right to any form of appeal insofar as
such waiver can validly be made.”
By consent the proceedings seeking to set aside the award were removed from
the High Court to the Court of Appeal.
All five Judges delivered detailed judgments. Space does not permit a thorough
review of them all. The central question in the case was whether the famous case
of Czarnikow v Roth, Schmidt & Co [1922] 2 KB 478 (which contains broad
statements to the effect that the agreement of the parties cannot oust the
jurisdiction of the King or Queen’s Courts to apply the law of England) should be
extended to the common law doctrine concerning error of law on the face of the
award. In other words, were there any relevant modern public policy reasons
which should be held sufficient to prevent parties to an international business
contract agreeing to exclude judicial review? As recorded in the report at 675,
Counsel for Badger Chiyoda summarised its case by saying:
“...we are inviting the Court to hold that the Czarnikow rule [as to
inability to oust the jurisdiction of the Court] should not apply to
international commercial arbitrations in one-off contracts where the
jurisdiction relating to error of law on the face of the award.”
The Court unanimously upheld this proposition. Reference was made to the New
Zealand Law Commission discussion paper on ‘Arbitration’ and its reference (at
p7) to a “tension between party autonomy and judicial control, and the need to
strike a balance”. It was noted that for a decade and more there had been a
strong trend in common law countries towards giving greater rein to party autonomy,
partly in emulation of other systems of law and especially in international
commercial arbitrations. Contributing causes had been the perceived preferences
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The Resolution of Disputes
of business people, the clogging of Court lists, and in England a phase of heavy
resort to the case stated procedure encouraged by the decision of the Court of
Appeal in Halfdan Greig & Co A/S v Sterling Coal & Navigation Corp [1973] QB
843.
It was held the ICC Rules had an international currency and it would have been
singularly inappropriate to import into their construction technical distinctions
existing in some areas of English law between appeals and review. The process of
arbitration under the ICC Rules imposed its own safeguards by the adoption of
processes whereby the appointment of the arbitrator and any award were subject
to supervision. The Court was satisfied the contractual intention of the parties
was to exclude any application for review of the award on the ground of error on
the face of the award. It was further held ss 11 and 12 of the Arbitration Act 1908
did not prevent contracting out in these circumstances. The waiver of rights of
appeal from an award arbitrated under the ICC Rules by two large multi-national
companies with equal bargaining power was not contrary to public policy.
Multi-tiered Dispute Resolution
Other contributors to this book consider various alternative dispute resolution
techniques which may be used instead of, or in conjunction with, arbitration.
Multi-tiered dispute resolution clauses have become a commonplace in international
construction contracts. They typically call for consultation, negotiation or mediation
before a dispute can go to arbitration. While these clauses are fashionable, in
practice they can create more problems than they solve, especially if they are not
drafted properly. Moreover, a danger with such procedures is that they become
just an expensive and time-consuming prelude to arbitration. The difficulties which
can flow from multi-tiered dispute resolution clauses have been aptly captured in
the famous article by Professor Varady called “The Courtesy Trap” (1995) in the
Journal of International Commercial Arbitration.6  The following extracts summarise
the theme of the Varady article:
“In a number of cases, the parties want to emphasise that the fact
that they are designing a mechanism for settling disputes does not
mean that they have opted for an adversary rather than cooperative
relationship. Therefore, they make assurances that they shall first
try to resolve all differences by friendly negotiations. Arbitration is
posited only as a last resort, in case sincere endeavours to reach an
amicable settlement are fruitless. Such introductory provisions of
the arbitration clause are typically viewed as a gesture of friendliness
and good intentions, as a display of courtesy.
Parties can, of course, always settle a dispute whether they foresaw
this option or not. At the same time, no provision on joint endeavours
6 See also Pryles “Multi-tiered Dispute Resolution Clauses” (2001) Journal of International Arbitration 157, which
focuses on Australian cases.
239
in seeking a settlement can really prevent any party from thwarting
it. Yet it certainly sounds friendly, and inspires more confidence if
the arbitration clause starts with:
“All disputes arising out of or connection with this Contract
shall be settled amicably between the parties ... and then
continues: “If no amicable settlement can be reached, the
dispute may be submitted to the Court of Arbitration at the
Chamber of Commerce of ...”
The context of this declaration of good intentions is, however, not
innocuous. A condition is actually set, which places arbitration a
step beyond immediate reach. This step may be a trying one. Placed
within the arbitration agreement, any formulation – even if it was
just meant to be a gesture – becomes a possible stepping stone in
various procedural gambits. The question arises from when and
until when is the arbitration agreement actually operative if resort
to arbitration is contingent upon failure of settlement. Dilemmas
and possible difficulties may emerge both in cases of failure, and in
cases of success in reaching an amicable settlement.”
After providing some worrying examples of multi-tiered dispute resolution clauses
causing major legal problems Professor Varady concludes:
“The parties can always settle both before and during arbitration,
and they can always hinder the conclusion of a settlement if they
wish so. For these reasons, a clause providing for a search for an
amicable settlement does not really add novel options; what it
essentially does is to contribute to a more friendly negotiating
environment. But there are many ways to achieve the same purpose.
A glass of wine might do better and it is less expensive too.”
The problems with them have been discussed at length in a recent special edition
of the newsletter of Committee D, Arbitration and ADR of the International Bar
Association’s section on Business Law, Volume 6, No 2, October 2001. Some of
the important questions which these multi-tiered clauses raise are identified in
the Committee D Newsletter as follows:
• Is the first tier agreement to negotiate or mediate prior to arbitration enforceable?
In particular, how do such agreements to negotiate or mediate fare in jurisdictions
which have historically declined to enforce so-called agreements to agree as
indefinite, illusory or otherwise unenforceable?
• If the first tier agreement to negotiate or mediate is enforceable, what does it
require substantively as far as actual negotiations or mediations are concerned
and what remedies, if any, are available for the breach of such an agreement to
negotiate or mediate?
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The Resolution of Disputes
• Who decides the preceding questions – the Courts on a motion to stay litigation
and/or compel arbitration, or the arbitrators?
• Whether the agreement to negotiate or mediate in the first instance is enforceable
has been breached and the remedy for such breach.
• Can the parties’ agreements to arbitrate and the multi-tiered dispute resolution
clause be enforced under laws and conventions that provide for the enforcement
of arbitration agreements where the initial negotiation or mediation tier has not
been completed or otherwise complied with? For example, may a party who
believes that it would be futile to engage in the contractually stipulated
negotiation or mediation proceed directly to arbitration and to seek judicial
enforcement of its counter-party’s obligation to arbitrate?
The IBA report shows that there have been differing answers to these questions
around the world.
While space does not permit a detailed consideration of all of the leading cases,
the following cases are representative.
Resort to arbitration may be premature
One of the cases discussed by Professor Varady is an arbitration between A
Biloune (Syria) and Marine Drive Complex (Ghana) as Claimants v Ghana Investment
Centre and the Government of Ghana as Respondents (reported in XIX Yearbook
Commercial Arbitration II (1994) 11). There the arbitrators had to consider an
arbitration clause containing the following provisions:
“(1) Where any dispute arises between the foreign investor and the
Government in respect of the enterprise, all efforts shall be
made through mutual discussions to reach an amicable
settlement.
(2) Any dispute between the foreign investor and the Government
in respect of an approved enterprise which is not amicably
settled through mutual discussions may be submitted to
arbitration;”
Claimants started arbitration, while respondents objected that this was in violation
of the arbitration agreement which required that before arbitration is commenced
“all efforts shall be made through mutual communications to reach an amicable
settlement”. The question which presented itself was whether sufficient efforts
had been made to satisfy the condition set. The problem was that the wording ‘all
efforts’ was not easily translatable into specific undertakings which would represent
a fixed threshold.
The arbitrators opted for an interpretation which gave a better chance to the
arbitration process, stating that the “claimants have made a clear showing of
241
their efforts to reach an amicable settlement” by the fact that “on more than one
occasion the claimants invited negotiations with respondent on this matter. GIC
failed to make any response to those invitations.”
A New Zealand decision to the same effect is a case that also demonstrates the
presumption in favour of upholding arbitration agreements is Marnell Corrao
Assoc v Sensation Yachts (unreported, High Court, Auckland, CP 297/SW00, 22
August 2000, Wild J). The dispute resolution clause in the contract between the
parties provided for: negotiation between the parties, negotiations between the
parties’ chief executives, reference to the architect for his formal decision, and
arbitration, in that order. The plaintiff argued that the dispute could not be referred
to arbitration because the precondition that the dispute be referred to the chief
executives of each party for the purpose of negotiation had not been satisfied.
The Court noted that the reason for the failure to comply with the negotiation
precondition was the plaintiff ’s failure to respond to the defendant’s attempts to
negotiate. It concluded that the plaintiff could not take advantage of his own
wrong and referred the dispute to arbitration. At p 26 Wild J noted:
“That result gives effect to the general principle that the Courts
should uphold arbitration, by striving to give effect to the intention
of the parties to submit disputes to arbitration, and not allow any
inconsistencies or uncertainties in the wording of or operation of
the arbitration clause to thwart that intention.”
Similar comments were made in On Line International Limited v On Line Limited
(unreported, High Court, Christchurch, CP 2/00, 4 April 2000, Master Venning). In
the course of granting a stay in support of a dispute resolution clause which
required the parties to first seek to have the matter amicably settled through
discussions, with the right to seek arbitration if such settlement had not been
reached within a 30-day period, the Master noted at paragraph 24, that “a party
would not be able to avoid going to arbitration by refusing to seek to have the
matter amicably settled”.
It is of course possible, as Professor Varady points out, to endow the conciliatory
‘gesture’ with more precise content. The 1987 FIDIC International Conditions of
Contract provide in Article 67 for two preliminary steps after which resort to
arbitration becomes possible:
• the intervention of the engineer; and
• an endeavour to reach an amicable settlement between the parties.
The condition of resorting to the engineer has given rise to frequent debates7. As
far as the endeavour to reach an amicable settlement is concerned, the ambiguity
of this condition is alleviated by the fact that it is deemed to be met after the
7 See Fouchard, Gaillard, Goldman, Trait  de l’arbitrage commercial international, Paris 1996 20-21. See also ICC
Award 6230 of 1990, reported in XVII Yearbook Commercial Arbitration 164 (1992)
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The Resolution of Disputes
expiration of a fixed term (56 days). It is however clear that it will not be possible
to resort to arbitration if the dispute has not first been referred to an engineer.
In Con Dev Construction Limited v Financial Shelves No 49 Limited (unreported,
High Court, Christchurch, CP 179/97, 22 December 1997, Master Venning) the
Court was required to consider S 12 of the NZS 3910:1987 Standard Conditions of
Contract, the scheme of which required every dispute or difference to be referred
to an engineer in the first instance, with either party then having the right to
require the dispute to be referred to arbitration if they were dissatisfied with the
engineer’s decision. The plaintiff had failed to accept a person nominated by the
defendant as engineer for the contract, with the result that no engineer had been
appointed; and the dispute in question had not been referred to an engineer. The
plaintiff’s application for the appointment of an arbitration by the Court was
dismissed because of the failure to satisfy those pre-conditions.
Resort to Arbitration May be too Late
Another possible problem also mentioned in Professor Varady’s article is that
failure to reach an amicable settlement in the time specified in the clause may
prevent valid resort to arbitration. In one case Transport-in Handelsmaatschappij
‘Vekoma B V (Netherlands) v Maran Coal Corporation (USA)’ [Decision of the
Swiss Bundesgericht of 17 August, 1995 (unpublished)] the arbitration clause in
the parties’ contract provided as follows:
“Any dispute of whatever nature arising out of or in any way relating
to the Contract or to its construction or fulfilment may be referred to
arbitration, such arbitration shall take place in Geneva (Switzerland)
and shall proceed in accordance with the rules of the International
Chamber of Commerce. The said difference or dispute shall [be] so
referred by either party within thirty days after it was agreed that
the difference or dispute cannot be resolved by negotiation.”
The ICC tribunal found that the clause required the party choosing arbitration to
comply with the 30-day requirement. The seller contended that this requirement
had not been met, and that the buyer was therefore deprived of its arbitration
option. The ICC tribunal held that the dispute had been referred to arbitration
within 30 days after it was agreed that the difference or dispute could not be
resolved by negotiation. The facts were that the claimant had written, saying that
if no reply was received by 17 January 1992 “we shall have to apply for arbitration”.
The defendant did not respond at all to the fax. Three months passed and the
claimant then wrote again to the defendant, saying “We continue to await a
response to the settlement proposal”. The defendant then responded that it had
assumed the subject was closed. The ICC tribunal said that time ran from the
letter of 13 April 1992 and therefore made an award in favour of the claimant.
However the Swiss Supreme Court found that the 30 day time limit ran from 17
January 1992 and therefore the arbitration had not been commenced within the
243
30 day limitation period and it accordingly set aside the award, a rather startling
result.
International Mediation /Conciliation
As discussed below, the world’s leading arbitral institutions now offer institutional
mediation or conciliation. The only notable ad hoc rules are the UNCITRAL
Conciliation Rules 1980. Parties may stipulate in their contract an institution to
conduct mediation when a dispute arises for several reasons. Because of the
consensual nature of mediation, parties value having rules set in place, so as to
avoid undue delay that may arise when the parties are deliberating how to run
the mediation. Although institutional mediation involves a higher cost as an
administrative fee is required, parties to an institutional mediation receive benefits
otherwise missing in an ad hoc mediation. An institutional mediation provides
trained staff who are experienced in organising international mediations and
most importantly, a set of mediation rules which provide a reliable structure.
Further advantages of institutional mediation is provision of a framework provided
in selecting a mediator, the process to be followed and the administrative support
provided by the institution. It is this advantage of institutional mediation which
has caused a trend towards administered dispute resolution.
As noted above, all of the main arbitration institutions provide mediation services,
and the growing importance of, and demand for, mediation facilities can be seen
in the recent review of these mediation rules. They include:
• International Chamber of Commerce Amicable Dispute Resolution Rules, in force
as from 1 July 2001 (ICC Rules);
• London Court of International Arbitration Mediation Rules, in force from 1 October
1999 (LCIA Rules); and
• American Arbitration Association Commercial Mediation Rules, as from September
2001 (AAA Rules).
In 2000 the ICC ADR Rules replaced the ICC Rules of Conciliation. The conciliation
rules were replaced so as to encompass other non-binding forms of dispute
resolution. The ICC ADR Rules allow the parties to choose the settlement technique
that suits their dispute. However, in the absence of agreement, mediation will be
used. This is a unique aspect of the ICC Rules, as other institutional rules provide
for conciliation or mediation only. The new ICC ADR Rules are more compliant
with the voluntary nature of mediation, with these rules maximising party autonomy.
Application and Scope of the Various Rules
Article 1 of the UNCITRAL Rules states that the UNCITRAL Rules apply to the
“conciliation of disputes arising out of or relating to a contractual or other legal
relationship”. There is no requirement for the dispute to be contractual, international
or related to commercial matters. The UNCITRAL Rules are intended to emphasise
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The Resolution of Disputes
the consensual nature of mediation through the use of the words ‘amicable
settlement’. This is further highlighted in Article 1.2, which allows parties to “exclude
or vary any of these Rules at any time”. The concept of the UNCITRAL Rules
applying in ad hoc mediations is demonstrated through the detailed nature of the
rules. The UNCITRAL Rules are more detailed than the institutional rules by providing
that any UNCITRAL Rules which conflict with a provision of law are deemed to be
overridden by the relevant provision.
The AAA Rules state the mediator shall interpret and apply the AAA Rules insofar
as they relate to the mediator’s duties and responsibilities, and all other rules
“shall be interpreted and applied by the AAA”. Parties which mediate under the
auspices of the AAA are deemed to have accepted the [AAA] Rules.
Although the ICC does not require the dispute to be of an international character,
the dispute must be a business dispute. Similar to the UNCITRAL Rules, the ICC
Rules acknowledge the voluntary nature of mediation by stipulating the provisions
of the rules “may be modified by agreement of all of the parties”, subject to the
approval of the ICC. This condition of ICC approval is justified on the basis of
upholding the integrity of the ICC Rules.
Similar to the AAA Rules, the LCIA Rules state in the preamble that parties using
the LCIA Rules “shall be taken to have agreed that the mediation shall be conducted
in accordance” with the rules. Note that the LCIA and AAA do not explicitly provide
for party modification of the rules, but in practice reasonable agreed modifications
would doubtless be permitted.
Distinctive Features of the Various Rules
All of the above rules provide a workable framework for an international commercial
mediation. The rules are quite simple and brief, and allow the institutions to be
as flexible as possible. The LCIA and ICC Rules are very similar, with the provisions
providing for confidentiality and the selection of the mediator almost identical.
Both sets of rules are comprehensive, with the ICC Rules providing more detail
regarding the termination of mediation.
The UNCITRAL Rules are more detailed than the institutional rules. This is because
of the need for more structure in an ad hoc mediation that does not offer any
administrative support. As stated above, the UNCITRAL Rules expressly provide
for parties to modify the rules, and it is therefore expected that some of the rules
will not be utilised or will be varied.
A distinctive feature of the Rules is the provision for two or three conciliators if
the parties so agree. The author’s recent experience as one of three conciliators
under these Rules in a conciliation between Enron and the Government of India
demonstrated that a three-conciliator procedure was difficult unless certain of the
rules were modified. Article 16 of the UNCITRAL Rules is worthy of note.
It provides:
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“RESORT TO ARBITRAL OR JUDICIAL PROCEEDINGS
Article 16
The parties undertake not to initiate, during the conciliation
proceedings, any arbitral or judicial proceedings in respect of a
dispute that is the subject of the conciliation proceedings, except
that a party may initiate arbitral or judicial proceedings where,
in his opinion, such proceedings are necessary for preserving
his rights.”
Enforceability of Mediated Settlement Agreements
One issue which has often been debated is the extent to which it is possible to
convert a mediated settlement into an arbitral award enforceable under the New
York Convention of 1958. The issue can be illuminated by reference to the 1999
Stockholm Chamber of Commerce (SCC) mediation rules (SCC Rules), of which
Article 12 provides:
“Upon reaching a settlement agreement the parties may, subject to
the approval of the Mediator, agree to appoint the Mediator as an
Arbitrator and request him to confirm the settlement agreement as
an arbitral award.”
The main debate surrounding the legitimacy of this practice is with regards to the
issue that the parties have already resolved their dispute before the arbitrator is
appointed. Although all the main arbitral institutions provide for situations where
the parties settle their dispute during the course of arbitration, and give such
agreements the force and effect of an arbitral award, it may be argued that
provisions like Article 12 of the SCC is quite another matter because the authority
of the arbitrator to exercise his jurisdiction is not invoked until after the settlement
of the dispute.
Hill and Newmark suggest the answer lies in Article 2 of the New York Convention:
“Each Contracting State shall recognize an agreement in writing
under which the parties undertake to submit to arbitration all or any
differences which have arisen or which may arise between them in
respect of a defined legal relationship, whether contractual or not,
concerning a subject matter capable of settlement by arbitration.” 8
Hill and Newmark argue that because the appointment of the arbitrator only
arises once the dispute has been settled, there is no agreement to submit a
dispute to arbitration as required by Article 2 of the New York Convention.
Mustill and Boyd also suggest that it is not possible to appoint an arbitrator in
8 Hill R & Newmark C, “Can a Mediated Settlement Become an Enforceable Arbitration Award?” [2000] 16 (1)
Arbitration International, 81.
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The Resolution of Disputes
9 Mustill and Boyd, Commercial Arbitration, (2nd edn., 1989) 47.
circumstances where there is nothing to be arbitrated:
“Where a dispute was at one time in existence, but has subsequently
been resolved by agreement, the arbitrator’s jurisdiction to award
upon it depends upon the timing of the agreement. If it took place
before the arbitrator was appointed, he has no jurisdiction, for this
appointment relates only to current disputes.” 9
It therefore seems that there must still be a dispute in existence at the point of
time when the arbitrator assumes jurisdiction.
Improving International Arbitration in Construction Cases
The ICC Commission on International Arbitration published in 2001 a helpful Report
on Construction Industry Arbitrations. It contains many useful suggestions for
improving the efficiency of international construction arbitrations. The Report can
be downloaded from the ICC web site at (www.iccwbo.org).
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Jason Le Masurier
Conclusions
Jason Le Masurier
If a man will begin with certainties, he shall end in doubts; but if he
will be content to begin with doubts he shall end in certainties.
Advancement of Learning, Francis Bacon
Introduction
The above quote from Francis Bacon summarises broadly much of what has been
addressed in this book, and the current culture change in the construction industry.
Uncertainty is inherent in construction projects and attempts to achieve certainty
will lead to disappointment and conflict, whereas facing up to and accepting that
construction projects are complex and uncertain will focus attention on management
of the uncertainty. Effective management of uncertainty will not only reduce risks
but also maximise opportunity.
In this context, we have discussed how various contract forms are used to manage
risk and uncertainty. We have identified that problems are inevitable due to
uncertainty on construction projects and studied the various mechanisms through
which such problems are resolved. We have looked at the possible cultures that
can develop on a project and seen how cultural uncertainty is controllable by the
project players through the management style and contract form.
The three main topics of contract forms, culture, and dispute prevention/resolution
are interrelated. The contract form and the procedures put in place for dealing
with disputes act as an implicit specification for the culture and conduct of the
project players. Similarly, through feedback and learning, the culture developed
on a project will influence the types of contract and dispute procedures used on
future projects. Eventually, this process may change an entire industry culture.
Contracts — Carrot or Stick?
Contractual arrangements may either emphasise the difference between the parties,
or the mutuality – their independence or interdependence. The former can be
called the ‘stick’ approach, where the contract ‘stick’ is used figuratively to keep
the parties separated (and in times of conflict, to beat each other with!). The
latter is the ‘carrot’ approach, where each party has a share in the rewards of the
project, since it should be possible, and indeed the aim, on every project, barring
the most ill conceived, to end up with a net gain for all parties. Most standard
forms have a combination of ‘carrot’ and ‘stick’ and it is the relative proportion of
each that will tend to dictate the nature of the relationship.
12
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Conclusions
The features of contracts that act as a stick are, for example, clauses that seek to
polarise the risks, such as the clause in the new FIDIC conditions pointed out by
Bunni1 “The Contractor’s risks are all risks other than the (specified) Employer’s
Risks”.
Using the same word but in a different figurative context, Firth2 referred to “Those
who try to draft smart clauses to “stick” the contractor with that risk”
The types of clause referred to here are particularly unfair if the contractor is
made responsible for the risks flowing from poor project culture3, which may be
largely the fault of the Employer through choice of an inappropriate procurement
approach.
Tuohey4 and Firth emphasised the negative consequences of trying to put the
contractor into an exposed position through the contract, in particular through
what could be called inappropriate mixing of carrots and sticks. For example
putting projects out for tender under a guaranteed maximum price when the
design is incomplete and the contractor is required to accommodate the risk of
future design changes.  Contracts must not only make clear the risks carried by
each party, but have within them a fair mechanism for dealing with these risks.
If the parties have been separated by the stick approach, each will strive to
maximise their position relative to the other. As Bunni5 pointed out, a characteristic
of (traditional) construction contracts is:
“...risk cultivation by the parties involved, or by others associated
with them, or advising them. The objectives of risk cultivation serve
to enhance the position of the party involved in such tactics.”
Of course, the contractor has an equally important role to play in ensuring that
the contract is fair. If certain aspects of the contract requirements are clearly
unfair to either party or if the contractor spots a potential loophole, then it is in
the best interests of the project and any ongoing relationship, for the contractor
to point these out and seek a change to the contract before signing, or to refuse
to enter into it6.
Ideally a contract will achieve a fair balance between carrot and stick. The risks as
well as the rewards need to be shared equitably. Target cost contracts are a good
example, such as the NEC Option C, where a mechanism for sharing cost savings
or overruns is put in place. Related to this, roles and responsibilities need to be
clearly defined and we have seen how modern forms of contract are clearer and
more readily understood by their intended users than their traditional counterparts.
1 Bunni, Chapter 4, page 39.
2 Firth, Chapter 10, page 180.
3 Le Masurier, Chapter 4, page 45.
4 Tuohey, Chapter 4, page 58.
5 Bunni, Chapter 11, page 219.
6 Henriod, Chapter 10, page 219.
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Jason Le Masurier
Project Culture — Contractual or Managerial?
The style and effectiveness of the management of a project is related to the
culture, which is also influenced by the contract.
Kay7 suggested a fundamental change in the industry culture is from relationships
based on contract direction, towards business relationships based on aligning
objectives; he summarised three construction contract paradigms covered during
the conference. Firstly the constructivist approach, which says that the contract
governs the relationship and the more clearly we express the roles and
responsibilities, the more clearly defined the relationship will be. Secondly, the
realist approach, which says that the relationship is independent of the contract,
that no matter what form of contract you have, the people will determine the
relationship. Thirdly, the synergistic approach, which combines the other two,
where the relationship is the product of the contract and the people. In relation to
the synergistic approach, Kay suggested that the culture change is about moving
towards relationship-based contracting, seeing the way we operate from the point
of view of the business relationship and how to collaborate, to gain more than
the sum of the parts.
Standard forms of contract, as discussed earlier, are based on the constructivist
approach. The realist approach could also be called a fatalistic approach, i.e. no
matter how fair or unfair the contract, a project’s success, or failure, will depend
upon the maturity or enlightenment of the project participants. There are certainly
examples of project teams rising above what would be generally considered
adversarial contract conditions, to develop a collaborative culture. Equally, there
are examples of projects that have started off with Partnering Charters, where the
players have reverted to traditional stereotypes and become adversaries.
Most standard forms of contract rely implicitly on the involvement of enlightened
people for project success and do not address the risks of poor management,
expressed by the realist approach. In contrast the NEC, with its principle objective
to be a stimulus to good management, directly addresses the management-related
risks. In this sense it is the only standard form of contract that recognises that
effective management should not be left to chance; leaving it to chance is exposing
the project to one of the greatest risks — an organisational failure8.
Manifestations of the synergistic approach are seen in the industry. For example
non-contractual relationships such as alliance agreements9 and the tendency to
use non-price attributes in the selection of companies and individuals for projects,
based on their track record.
Whilst few would argue against collaboration in preference to confrontation for
overall project success, there is a conundrum associated with the use of
7 Contribution from Nigel Kay of Sinclair Knight Mertz, NZ at CAE Conference on the Contract in Successful
Project Management, Christchurch, February 2002.
8 Le Masurier, Chapter 4, page 45.
9 See Freeflow Alliance, Chapter 8, page 119.
250
Conclusions
collaborative approaches in the management of construction projects. Promotion
of collaboration relies on the involvement of sufficiently mature and trusting
project players, however, to gain the necessary trust and maturity, the players
need to have experienced and recognised the benefits of such management
approaches.
If a project owner’s previous experience of the industry is one of poor service,
then that owner may not have developed the necessary trust and maturity to opt
for a contract form that promotes collaboration and sharing of risk and reward.
For these owners, the contract of choice will be one that strives to achieve certainty
and isolate the owner from the project risks. Experience shows the harder they try
to mitigate their risks, the worse their position can become, whereas adopting a
collaborative form of contract will generally lead to a more satisfying outcome10.
Disputes — Prevention or Cure?
Notwithstanding the form of contract and culture in place on a project, the uncertain
nature of construction means that problems are inevitable. The mechanisms for
dealing with such problems vary with the contract form and culture, but can be
broadly categorised as either preventative or curative, when considered in relation
to problem escalation and disputes. In the preventative category are management-
based approaches integral to the project team, such as facilitated discussions11,
culture change programmes12 and issue resolution ladders13, a feature of partnering
projects. A characteristic of the preventative approach is that problems are resolved
within the project team. In contrast, the curative approach is characterised by
dispute resolution involving people external to the project team.
Traditional forms of contract attempt to prevent problem escalation through the
impartial role of the Engineer, who is indeed integral to the project team, but as
Burrows pointed out14, the dual responsibility of the Engineer under the contract
can prove to be too heavy a burden. Hence, in these traditional forms of contract,
a curative approach may be used when a neutral party (the ‘expert’ in NZS391015)
is introduced after a dispute has arisen that cannot be resolved among the project
parties.
The new forms of contract recognise that, in place of the traditional ‘Jekyll and
Hyde’ role, an engineer can realistically fill only one role. It was suggested16 that
this presents engineers with a new opportunity to be more proactive and fill a
10 Stockman, Chapter 8, page 112.
11 Pavelka, Chapter 9, page 159.
12 Le Masurier, Chapter 4, page 49.
13 Henriod, Chapter 9, p 164.
14 Burrows, Chapter 2, page 14.
15 Wilkinson, Chapter 7, page 103.
16 Brent Johnson, of Beca, Carter, Hollings & Ferner, at CAE Conference on the Contract in Successful Project
Management, Christchurch, February 2002.
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Jason Le Masurier
role as facilitator of cooperative partnerships, separate from the engineer filling
the role of owner’s representative, the arrangement used in NEC17.
Dispute Review Boards18 (DRB) straddle the prevention/cure boundary since the
DRB keeps in continuous close contact with the project but is one step removed
from the project team. There is clearly benefit in having a neutral party (or board),
in place from the start of a project, to whom any disputes are referred as and
when they arise, rather than introducing the neutral after a dispute has arisen
and the project is already on the back foot; in the former case the neutral can be
proactive in preventing disputes from escalating. Of course, internal preventative
facilitators can be used in conjunction with DRBs and any other curative dispute
mechanisms.
In the tiers of dispute resolution19 each step, from team-based, to DRB, to
adjudication and finally arbitration, manifests as a quantum change in a project’s
culture. The first, possibly most significant step, marks the change from prevention
to cure, internal to external, and represents, to some extent, a failure on the part
of the project team and will consequently undermine the relationship.
Strong views have been expressed on this topic by authors of the various papers.
Both views need to be seen in context. From the perspective of engineers, who
would like to retain control of the process and hence tend to favour the preventative
approach, a dispute going to adjudication or arbitration reflects as a failure on
themselves. From the perspective of an adjudicator or arbitrator who will generally
have wide experience of the causes and potential complexity of construction
disputes, their role as an impartial ‘hand on the tiller’, if used in time, can help to
keep the project moving forward.
The two viewpoints probably also reflect the experience of the respective
protagonists. Few engineers will have been involved in projects that have reached
the point of adjudication or arbitration; most adjudicators and arbitrators will not
have been involved in projects that have run smoothly.
Barnes20 has given the engineer’s side of the argument saying that mediation,
dispute review boards and alternative dispute resolution generally are approaching
dispute resolution from an uncomfortable stand point, i.e. curative. In a scathing
attack on arbitration Barnes asserted that arbitration is “a seriously defective
method of settling disputes on engineering and construction projects. It is
ludicrously slow and ludicrously expensive and its outcome is very often random”
The common ground between both views is that problems and disputes should
be resolved before they fester and develop into much greater disputes that damage
the relationship further.
17 Barnes, Chapter 6. page 86.
18 Henriod and McDonough, Chapter 9, page 168.
19 Bunni, Chapter 11, page 216.
20 Barnes, Chapter 6, page 88.
252
Conclusions
The protagonists of the ‘cure’ school of thought therefore argue that contract
terms that require multi-tiered dispute resolution can mean that unsuccessful
attempts to resolve the dispute at a lower level, delay the reaching of a final
decision, which can further complicate the issue.
Williams21 argued that the problem arises because a clause that requires attempts
at amicable settlement by various means before resorting to arbitration, places
arbitration a step beyond immediate reach. The dilemma is then over when
arbitration is invoked “if resort to arbitration is contingent upon failure of
settlement”. For example, either one of the parties may not agree to arbitration
because they feel that other means of settlement have not been exhausted.
Barker22 addressed the middle ground between these two views when he said: “I
should have thought this provision (to negotiate) unnecessary to insert in a
contract. As a matter of practical reality, people usually do negotiate initially and
proceed to arbitration or litigation as a last resort”.
This point again emphasises the interaction of culture and contract. The appropriate
project culture based on an interdependent relationship would ensure that every
means for amicable resolution is explored, prior to resorting finally to a provision
for arbitration in the contract. Another point of agreement between the two views
is that arbitration is preferable to litigation and so rather than default to the
latter, it is important to state in a contract, however friendly it is trying to be, the
mechanism for arbitration as the last resort.
The Way Forward
The new approaches discussed in this book expand the range of options available
to industry players. The most appropriate approach will depend on the individual
project and the market in which it is undertaken. At one extreme, there will
always be one-off clients who see no benefit in developing a relationship with
their supply chain and who will take their chances on lowest price bidding with
maximum risk transference through traditional contract forms. At the other extreme,
there are large infrastructure asset owners who can benefit from forming long
term relationships, less reliant on contracts, with construction companies willing
to align their business objectives with those of the customer.
The maturity of the industry will influence the choices available. In an immature
market, where each party sees themselves as independent from other project
parties and each seeks to maximise their own rewards, collaborative forms of
contract are inappropriate. In such markets there will be winners and losers;
providing all the players understand and accept this they will probably see no
reason to change. However, as projects get larger, the stakes get higher and being
a losing party has greater ramifications23. Through a type of evolution, the market
21 Williams, Chapter 11, page 238.
22 Barker, Chapter 11, page 208.
23 See Kariba dam example by Henriod, Chapter 10, page 190.
253
Jason Le Masurier
has matured in some countries, to recognition of the interdependence of project
players and processes; the immature markets can benefit from this example and
follow the same evolutionary path more rapidly, if they chose.
There is plenty of experience emerging in the mature markets to show how new
types of relationship and forms of contract can be applied to a range of
circumstances. The onus lies on construction professionals to understand the
benefits and risks associated with any particular project strategy and advise
clients appropriately; limited knowledge and experience of new approaches in
the profession is not be an excuse for continuing the status quo.
The extent to which culture change occurs will depend upon the driving force
behind it. A project crisis can cause a project’s culture to change24. Similarly, an
industry crisis can cause an industry culture change. The bigger the crisis, the
greater the drive and the more radical can be the solution. The current UK and
USA industry culture change is a reaction to the crisis of extreme adversity in the
1980s and 1990s.
In New Zealand, the industry culture did not degenerate to the level of adversity
experienced in the other parts of the world, so perhaps the driver for change is
not so great in this country. Nevertheless, the contractual relationships in New
Zealand are far from ideal on some projects and there is scope to improve generally.
The CAE conference highlighted the level of interest in new approaches to
construction, but as one delegate25 pointed out, “the ten thousand people who
aren’t here, the clients, the constructors, the suppliers, the designers ... are the
ones that need to be convinced of the move to a relationship-based contract”.
There is a challenge to spread the message and inform others of the alternatives
to the status quo. In particular to inform clients of the options open to them
when procuring construction work, since it is the clients who have the greatest
opportunity to influence the project culture.26 The Rethinking Construction27
initiative is doing this very successfully in the UK and we would like to establish
a similar initiative in New Zealand and our region of Asia and Oceania.
24 Le Masurier, Chapter 4, page 49.
25 Nigel Kay, Sinclair Knight Mertz, NZ.
26 Tuohey, Chapter 4, page 58.
27 See www.rethinkingconstruction.org
254
Conclusions
255
Appendix A
A Appendix A
This section includes three principal parts: first, a summary of presentations
made by representatives of the World Bank and the Asian Development Bank at
the CAE Conference, 17-19 February 2002; second, special papers on Contracts
and Project Management in China, by Lu Youjie, and on the lessons learned from
experience with international joint ventures in Asia, written by Lu Youjie and Tan
Wee Teck; and third, an example of the Worley Project Risk Management process.
The World Bank was represented by Armando Araujo, Director of Procurement in
the Operations Policy and Country Services Vice-Presidency; and the Asian
Development Bank by Ross Clendon, Senior Counsel. The notes that follow have
been taken from transcripts of their presentations, and the editors accept
responsibility for any interpretation that was necessary to prepare the précis for
publication, and for the notes in italics.
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257
Appendix A
The World Bank1: Points of View and Issues
Armando Araujo, Director of Procurement, Operations Policy and Country
Services, The World Bank 2
On Partnering
There are difficulties in applying the concept of partnering if the Principal is a
government. For example, partnering could raise issues of (lack of ) transparency.
In addition, in some developing countries there could be issues arising from the
relatively low level of sophistication of some of the government organizations
that would be the Principals in contracts, resulting in a difficulty to develop
mutual trust with a highly experienced and knowledgeable contractors from the
industrialized world.
Also, problems may arise with government employees who normally do not want
to take decisions by themselves: they would wish to protect themselves against
a change of government (and the personalities involved), which could result in
grave personal problems if the employees, acting as project managers, had not
taken decisions based on the strict letter of the contracts. They would thus need
to have very explicit, well-defined rules to apply in a partnering situation, or
somebody else to share the responsibility with. [The implication is that there
would be a loss of flexibility, as would be required in a true partnering arrangement,
where decisions may not necessarily be covered by the letter of the contract].3
Alliancing [when interpreted as a long-term strategic arrangement] would pose
another type of problem in World Bank-financed procurement: it implies the initial
selection of a firm that would then be the sole contractor for other projects over
a long period. This would entail lack of competition for ensuing contracts, and
competitive bidding is a basic principle of the Bank’s procurement Guidelines
(which are of mandatory application in all loans).
The World Bank has participated in partnerships with communities, and helps
finance many projects directly implemented by local communities. For instance,
Armando Araujo was Task Manager of a project in Argentina for the construction
of 5,000 houses, in a decentralized and participative approach, where the
communities were directly in charge of construction.  This was a great partnership,
not with contractors, but with the actual beneficiaries of the loan.
[The World Bank has participated in partnering in construction contracts for its
own Headquarters buildings—see Chapter 9]
1 The World Bank, or International Bank for Reconstruction and Development (IBRD), was established in 1947 to
assist in the reconstruction of the countries devastated by the Second World War. That role changed gradually,
as the reconstruction phase was completed, to a role of assisting in the development of the Third World. This
is principal role today, although reconstruction of war-torn countries — the victims of other wars — is still an
important commitment.
2 Mr Araujo’s comments have been transcribed from recorded speeches made at the CAE Conference, February
2002. While they express his views and opinions, they may not reflect current policy of the World Bank.
3 The text in italics within square brackets are Editor’s notes.
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On Disputes Review Boards
“I am considering ... to propose a new role of technical advisor. That could be a
role played by ... dispute review boards, which today are only addressing disputes.
In future, they could be changed to also assist the project manager in taking
decisions. ... boards of advisors are already assisting the project implementation
unit in the construction of large dams. ... this concept could evolve to help the
board to take a more proactive approach in managing the contract and giving the
sufficient technical comfort for the project manager to defend himself in the
future...”
[The above is an almost verbatim quote. Much as the proposal would help project
managers to protect themselves by disseminating responsibility among a larger
group — and we doubt the wisdom of such arrangement, which would mean
introducing management by committee — it is contrary to (a) the generally accepted
principles for the operation of Disputes Review Boards, the essence of whose
participation in a project is their total independence and impartiality, to enable
them to reach recommendations that are acceptable to the Parties; and (b) the
equally accepted principles of the technical panels established under the rules of
the International Commission on Large Dams [ICOLD], which are primarily concerned
with the safety of the structures, and not with management of construction].
Bank Clearances
Speakers mentioned that some banks require that they clear all variations. The
World Bank does not require such clearances. All World Bank-financed contracts
must include a provisional sum to cover variations and quantity and price increases.
The Bank also accepts increases in the total contract value of up to 15% without
prior approval, as well as extensions of time, provided they are not material. The
World Bank does not allow that clauses pertaining to unforeseen conditions be
deleted from contract forms: the standard form must be used in its entirety. In
that way the World Bank protects the interests of the Bank’s borrower, and those
of the contractor serving that borrower.
Contract Securities
World Bank-financed projects are normally covered by three kinds of security: the
bid, advance payments, and performance securities. For the bid security, the Bank
requires that [its borrowers] receive an ‘on demand’ guarantee, issued by a bank,
a surety, or an insurance company. The borrower is only required to certify to the
issuer of the security that the bidder has withdrawn its bid, failed to sign the
contract, or failed to produce a performance guarantee. Likewise, advance payment
security must be covered by guarantees payable on demand, since they are
protecting cash advances to the contractor. The World Bank does not require that
performance securities be ‘on demand’ guarantees: they may be normal bonds.
The texts of all these securities must follow the standard text in the Bank’s
Standard Bidding Documents, or a similar text that does not conflict with the
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Appendix A
requirements of the standard.
Information Technology
The World Bank has financed many IT contracts. The Bank’s standard contract
documents for IT permit flexibility. However, there is an issue for which “we do
not have an answer: the captivity of the borrower, or the direct client, by the
industry”. Once a technology has been chosen, the purchaser is captured by the
supplier, for all service and maintenance (and upgrades).
New Developments
“We are now working on output-based contracts. Some people call them
performance-based contracts, but we prefer to call them ‘output-based’. This
covers a big spectrum of contracts. We are now finishing one for maintenance and
rehabilitation of roads that will be based on this concept ... the contractor will be
responsible, not for the design, materials or other inputs, but for the quality of
maintenance performed”. When referring to concessions (BOOs, BOTs) their
performance will be judged by their outputs: for instance, in a metro (rail) system,
the (key performance indicators) may be the number of people transported, the
quality (of ride or service), or the interval between trains.
The World Bank is working with the other multilateral banks in the harmonization
of bidding and contract documents. This is a big challenge. “We have already
agreed with the other banks a standard new document for procurement of goods
that will be used by all the banks. We are working now on a prequalification
document, for civil works, and are starting to prepare a new (bidding document)
for civil works.” Part of the discussion hinges on the issue of whether to have one
umbrella contract for all purposes, or specific contracts for specific situations. The
World Bank favours the latter.
Another area in which the World Bank is working intensively is in the development
of local capacity in borrowing countries so they can handle their own procurement.
This is being done for the various activities and types of contracts, and assessments
are being carried out to determine the quality of local procurement processes, “so
that if a country’s procurement procedures are sound and have a good international
base we could accept those procurement processes.”
The Bank is also trying to help its borrowers in the area of electronic procurement.
Pilot projects are already under way in Mexico and elsewhere in Latin America.
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261
Appendix A
The Asian Development Bank
Ross Clendon, Senior Counsel, Asian Development Bank, Manila4
The Bank
The Asian Development Bank (ADB) is a regional multi-lateral development bank,
a ‘younger brother equivalentxc’ of the World Bank. It has been in existence for
35 years, and now has 58 member countries. The United States and Japan are the
two largest shareholders, with roughly 13 percent each of the total shareholding.
New Zealand’s share is about 1.5 percent, and Australia’s four percent. This places
Australia among the larger shareholders after the U.S. and Japan. Other large
shareholders include China, India, Germany and Canada. Of the 58 members,
roughly two thirds are eligible to borrow from the Bank (the ‘developing member
countries’); the other third are developed member countries. The geographical
span of the Bank extends from Afghanistan in the west, to the Pacific islands.
The headquarters of the Bank are in Manila; the ADB has a staff of 700, of which
30 are lawyers. Lawyers are outnumbered by engineers! The skill mix is changing,
however. It is moving into such areas as capital market development and softer
social issues, as the overarching focus of the Bank now addresses poverty
alleviation. Some of the social matters being addressed by many experts in the
region include the environment, gender issues, and resettlement.
Last year the ADB lent approximately US$6.0 billion, spread among about 80
different projects. The money the Bank lends is raised in the world’s capital
markets (similarly to the World Bank). Like the World Bank, the ADB has a triple-
A status in those capital markets, and that means they can borrow at ‘best rates’;
the funds are then made available to member countries, with a small spread over
the cost of the borrowed funds to cover administrative costs.
The traditional role of the ADB has been that of lending for major infrastructure
development by governments: roads, highways, ports, airports, water and
sanitation, rural irrigation, agriculture, health and education. This started to change
some 15 years ago, when the Bank began working with the private sector, something
that had been impossible under the founding charter5. The ADB also started work
in areas which had been the province of the International Monetary Fund, such as
lending, not for specific infrastructure or other projects, but to achieve policy
reform in certain sectors. The ADB refers this type of loan as ‘programme lending’
as opposed to the World Bank, which calls it ‘structural adjustment lending’.
The ADB helping the private sector—an example from Nepal
The Bank assisted in the establishment of the first Build, Operate and Transfer
4 Mr Clendon’s comments have been transcribed from recorded speeches made at the CAE Conference, February
2002. While they express his views and opinions, they may not reflect current policy of the Asian Development
Bank.
5 In contrast, the World Bank has a subsidiary, the International Finance Corporation, which is dedicated to
operate in the private sector of developing countries (Editor’s note).
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The Contract in Successful Project Management
(BOT) Project in Nepal, a run-of-river hydro power station, developed without
participation of the government. The Bank assisted as a ‘neutral party’, seeking to
ensure that the deal that was finally settled on would be in the best interests of
all parties. “The original construction contracts for civil works and the contracts
for mechanical (and electrical) engineering were drawn up by the suppliers of
those services. They were not going to be seamless; there would have been a lot
of problems. That was one example where the ADB acted as the family doctor,
having been called for help. The people of Nepal felt comfortable getting what
they felt was independent advice.”
One of the interesting aspects of developing the contractual basis for the first
Nepal BOT was the matter of the resolution of disputes, which could have been
the source of an impasse if limited to referral to the local courts of justice. The
intervention of the ADB assisted the government in making the necessary legislation
amendments to make the project ‘bankable’, by introducing international arbitration
as the means for dispute resolution.
As a rule, the ADB does not participate in projects where the private sector is
willing to take the burden or the challenge. Its role is that of a lender of last
resort, lending where the private sector will not. In the case of this project in
Nepal, the Bank played a catalytic role that enabled the first BOT project to go
ahead; this was followed not much later by another BOT project, this time arranged
in much less time.
Manila Water
The ADB is currently involved in trying to assemble a US$350 million financial
package for a concessionaire who has been awarded a 25 year contract to run the
water supply for Manila. The key risk considered was the political risk: in this
case, the developer needed an assurance that the provisions for setting the rates
would be honoured, and not over-ridden for political purposes. A technical grant
from the ADB will be used to ensure there is institutional capability for the technical
assessment and setting of the water rates.
The Bank will also participate in the financial package, with about 10% or 15% of
the total. Being a lender of record, this will ensure that the ADB’s various privileges
and immunities — such as those relating to taxation and the conversion to
foreign exchange and remittance of funds — will apply. This is very attractive to
other banks, and can turn a project into a ‘bankable’ proposition through the
presence of the ADB (or the World Bank or IFC, which have the same catalytic
effect).
Programme Lending in Kurdistan
A Programme Loan is being prepared for Kurdistan, to assist the country introduce
a Corporate Government and Enterprise Reform Programme. One of the problems
it will tackle is the reinstatement of an Arbitration Centre which is inoperative
263
Appendix A
because of provisions in the Constitution which require all disputes to be addressed
by the Courts of Law. Even though Kurdistan is a signatory of the New York
Convention on arbitration, this procedure for resolving disputes is not available
in the country. Without international arbitration, foreign investors may shun lending
to Kurdistan.
The Harmonisation Exercise
The regional development banks are involved in an on-going exercise with the
World Bank, seeking to harmonise the hitherto ‘recommended’ bidding documents6
into standard documents. Some documents have already reached that stage;
however, two important bidding documents, those for civil works — major and
‘smaller’ — are still being worked on. Nevertheless, it is expected that the whole
process of ‘harmonization’ will be completed before long. The next meetings of
the inter-bank drafting group is scheduled for later in 2002.
6 The World Bank’s Bidding Documents are ‘Standard’ documents, whose use by its borrowers is required, not
just recommended (Editor’s note).
264
The Contract in Successful Project Management
265
Appendix A
Contracts and Project Management in China7
Lu Youjie and Tan Wee Teck
Historical Perspective
Project management in China dates back to ancient times, as evidenced by a
number of well-known construction projects such as Great Wall, Great Canal and
the Forbidden City. Modern tools, techniques and methodologies for project
management, such as the Critical Path Method, Programme  Evaluation and Review
Techniques, and Graphical Evaluation and Review Techniques were brought to
China in the 1960s when China launched its nuclear weapon and missile/satellite
programmes.The defenc e, aerospace, science and construction sectors were the
first areas in China where modern project management techniques were applied.
Credit for dissemination of the techniques should be given to Professor Loo-Keng
Hua, a leading mathematician in China at that time. Knowing the potential of
successful project management for economic growth, social development and
defense strength of China, he and his assistants, setting their pure mathematics
research aside, began to promote network-based techniques throughout the country.
That is how modern project management took root in China.
The World Bank provided the second stimulus for project management to grow at
a very fast pace in China. China resumed its membership of IBRD (the World
Bank8) in 1980. Lubuge Hydroelectric Station in Yunan province was the first
hydroelectric project in China partly financed by an IBRD loan. Its construction
started in 1984. International competitive bidding was used for procurement of
the construction contract for the diversion tunnel of the project. The contract
entered into between the employer and a Japanese contractor included the FIDIC
Conditions of Contract, as recommended in the (then current) Sample Bidding
Documents for Procurement of Works of the IBRD. The Japanese contractor
successfully managed the diversion tunnel subproject following the modern project
management principles embodied in the FIDIC Conditions of Contract.  Stimulated
by the success of this project, the Chinese government began a reform of the
construction industry in 1984. One of the principal items in the reform agenda
was the promotion of project management techniques throughout the industry in
China.
MOC’s Efforts to Enhance Project Management Capability in Construction
The Ministry of Construction (MOC) has been playing a leading role in promoting
the improvement of project management in China.  Before 1984, construction
enterprises were under the administration of the central ministries and/or local
governments. Their operations were restricted by their supervisory government
agencies to certain sectors of the economy and/or to geographical areas. Their
7 This paper draws from ‘Construction Practice in China’, parts I and II, unpublished monograph for Civil
Engineering students at the Hong Kong Polytechnic University, by Lu Youjie, July 2000.
8 IBRD is the International Bank for Reconstruction and Development, widely known as ‘the World Bank’.
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The Contract in Successful Project Management
workloads and resources were allocated by their supervisory government agencies.
On the other hand, the majority of the enterprises were of general type, i.e. they
undertook the work of all the trades involved in a construction project, without
using subcontractors. All their human resources, skilled and unskilled workers,
engineers, office staff and managers were permanently employed, no matter how
big their workload was. The system resulted in low efficiency and effectiveness.
Starting in 1984, the MOC launched a number of reform programmes, aiming to
raise the efficiency and effectiveness of the state-owned construction enterprises
and the construction industry as whole. One of the issues that the reform
programmes addressed is closely related to the implementation of project
management techniques by the enterprises — ‘separating field operations from
management’.
The ‘separation’ has taken place both within and between the enterprises. On the
one hand, all the state-owned enterprises have given up the system of permanent
employment of line workers, especially the unskilled labour. The permanent
positions have been kept only for the technical and managerial staff and a limited
number of skilled operatives, subject to renewal of employment contracts regularly
at intervals of three or four years. The new system has enhanced flexibility in
matching the workforce with the workload and reduced labour costs.
On the other hand, a majority of the enterprises have been restructured to
concentrate on building work, specialist or labour-only subcontracting companies,
while only a small portion of them have kept their general contracting status. The
reorganisation has not only increased the efficiency and effectiveness of the
resources available to the state-owned construction enterprises and the construction
industry as a whole in China, but it has also made the enterprises more project-
oriented and friendly in their operation.
While the industrial restructuring got under way, a number of steps were taken by
the State Planning Commission (SPC) and MOC to promote project management
in the construction enterprises. In November 1987, the SPC instructed 15 selected
engineering enterprises to apply project management techniques to their operations.
Encouraged by the success of the selected enterprises, many other enterprises
followed suit. The excellent performance of 186 project managers was recognised
at a national conference held by the State Council in 1991, which further encouraged
the enterprises to apply project management techniques to their operations.
The Construction Project Management Committee was formed under the China
Construction Industry Association in 1994. The Committee held symposiums on
construction project management in September 1994 and October 1995 and the
participants exchanged their experiences, opinions and suggestions, covering a
wide range of topics on construction project management in China. The Department
of Construction Industry and the Department of Construction Supervision issued
Guidelines for Construction Enterprises to Further the Application of Project
Management Techniques in May 1996, requiring that efforts be made to put
267
Appendix A
project management on the right track.  The MOC issued the Procedures on
Administration of the Qualification of Construction Project Managers in January
1995 after the Tentative Procedure on Administration of the Qualification of
Construction Project Managers issued in July 1992 had been in effect for three
years.
In order to make the project managers competent for their roles and duties, and
bring them eventually up to the standards set out in the above Procedures, a
series of training programmes have been designed and offered under the auspices
of the MOC to project managers and other members of project management
teams. In June 1992 MOC issued a notice to all the state-owned construction
enterprises entitled A Notice on the Nation-wide Training of Construction Project
Managers, requiring that textbooks, tests and certificates meet the standards of
MOC. Following this notice, a drafting team was formed to write three textbooks
to be used in the training programmes throughout the country, and the first
educational institutions or training centres were accredited as project management
training providers in April 1993.  The three textbooks were superseded, after three
years in use, by six new textbooks published in January 1995.
One hundred and forty educational institutions or training centres had been
accredited by MOC as project management training providers up to the end of
1995.  During the same period, 321,983 project managers took the training courses
and 297,774 of them were certified by the MOC.
Starting from July 1, 1996, all applicants must be certified, as required by the
Procedures on Administration of Qualifications of Construction Project Managers,
before they take a position of project manager. At present the training and
certification in project management is going on regularly in China.
The Construction Project Management Committee produced a Construction Project
Management Procedure in April 2002 under the auspices of MOC. The Procedure
is based on the experience and lessons that the construction community in China
learnt over the past ten years. It represents the recognition of project management
as an effective project development approach, and a further commitment to its
dissemination by the construction community in China.
At present the typical management team for a construction project in China is
organized as shown in Figure 1.
The World Bank’s Contribution to Enhance Project Management Capability in
China
Just as is happening in other parts of the world, project management is no longer
limited to construction but has been adopted in most economic sectors in China.
To a certain extent, credit for this belongs to the World Bank. The World Bank
offered a number of training programmes in Beijing, Dalian and Shanghai, aimed
at improving the project management capability of China, since it started lending
268
The Contract in Successful Project Management
to China in the early 1980s. Among all such efforts is a programme for the training
of trainers that was implemented in 1994 and 1995. It was financed by a grant
from the World Bank. In July 1994, IBRD made an IDF (Institutional Development
Facility) grant in an amount of US$478,000 to China for the development of
project management training capability, and the establishment of an institutional
framework for such training. The activities that the grant covers include, among
other things, (a) identification, translation and preparation of training materials,
including case studies for training courses, (b) a training programme in Washington
DC for an initial number of 44 trainers from training networks’ institutions to be
selected, and (c) four training courses for project managers and officials from
concerned government agencies. The Ministry of Finance (MOF) of China contributed
33 percent of the total cost of US$757,650.
As required by the grant agreement between the IBRD and MOF, 44 persons were
selected from the universities, training centres and other education institutions in
China in November 1994. The 44 trainees attended a two-phase programme of
training in project management. The first and second phase were held at Tsinghua
University, Beijing in December 1994 and at EDI (the Economic Development
Institute of the World Bank, Washington, DC) in March and April 1995. The instructors
from the World Bank and the local consulting firms highly appreciated the
enthusiasm, hard working and learning motivation on the part of the Chinese
Project Economist
Repair
Electricians
Reinforcement
Batch plant
Supportive Operational
Teams
Assistant Managers
Marketing and AccountingPurchase and Supply
Test, set out, quality,
measurement
Technology Section
Production Manager Project Engineer
Project Manager
Project Accountant
Operational Gang 1
Operational Gang 2
Operational Gang 3
Figure 1: Organization of a Project Management team
269
Appendix A
participants. Immediately after the training programme a training network was
formed with five major universities in Beijing, Tianjin, Shanghai and Xi’an, aiming
at training project managers and specialists throughout the country on a regular
basis. The Project Management Center of Tsinghua University is currently leading
the network.
To make the training activities sustainable, the Project Management Center of
Tsinghua University had a series of textbooks in project management published
by Tsinghua University Press. In major cities in China many private firms use the
textbooks as teaching material when they offer training services to their clients.
The Chongqing Urban Environment Project (1998) and the Liao River Basin Project
(2000) were proposed for World Bank financing.  Both projects have an institutional
strengthening and training (IST) component. The author was employed with World
Bank funds as a consultant to devise the training programmes for the staff of the
specialist companies concerned with the environmental components of the projects,
as well as for the government officials involved in the two projects. The majority
of courses are project-management oriented. Table 1 is an excerpt from the report
the author wrote and submitted to the World Bank mission.
In conclusion, the World Bank has played an important role in promoting project
management in China.
The PMBOK Guide
The author translated PMI’s Standard Committee A Guide to the Project Management
Body of Knowledge (PMBOK, August 1994 draft), into Chinese in December 1994.
The translation was used, as a piece of teaching material, for the training of
trainers programme financed by the IDF grant from IBRD. That is the beginning of
access by the project management community in China to PMBOK. At present,
use of the PMBOK 2000 edition is extending in China, and it has become the
basis for writing a number of textbooks for training in project management in
China.
The FIDIC Conditions of Contract (Red Book)
A few Chinese state-owned construction enterprises, with the help of Hong Kong
businessmen, began to undertake construction contracts outside mainland China
in the late 1970s, exposing the Chinese construction community to international
conditions of contract for building and civil engineering construction, including
the FIDIC Conditions of Contract for Works of Civil Engineering Construction (the
Red Book). On the other hand, the World Bank includes the Red Book in its
standard bidding documents for procurement of works (previously the Third Edition
and currently the Fourth Edition). Experience in China shows that most of the civil
engineering works procured under the FIDIC conditions have turned out very
successfully. The Chinese employers find that the project management practice
and the employment of an impartial engineer, as provided for in the Red Book,
270
The Contract in Successful Project Management
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271
Appendix A
have been key factors for the successful development of projects.
FIDIC signifies a high level of sophistication in construction project management
to the construction sector in China. FIDIC is highly regarded and well known
throughout the industry. The construction sector increasingly needs engineers
who are fully conversant with the principles of the FIDIC contracts, to bring its
human resources to the same standard as those of the engineers engaged from
overseas.
On the other hand, a significant change has occurred recently within the Chinese
engineering design industry. Design professionals in China are primarily technically
oriented because of their education, training and experience. Many of them have
not had the opportunity to undertake consulting work prior to the design phase
of a project. However, the increasingly market-oriented clients and the growing
size and complexity of the infrastructure projects being developed have created a
major demand for a much wider range of consulting services. The design
professionals have increasingly had to take on the role of the project managers
and facilitators responsible for a broad scope of services. The majority of design
professionals do not, however, have the necessary skills, and it has been realised
that they need to be trained to the internationally-accepted standards of consulting
practice required to manage projects under the FIDIC conditions of contract.
In view of the situation an agreement was made and the FIDIC-Tsinghua University-
CNAEC9 Training Center created on April 29, 2001 at Tsinghua, Beijing, for
programmes and project management, with a main focus on the FIDIC Conditions
of Contract. The proposed training programmes are designed to prepare and/or
train the leaders in engineering-oriented project /programme management,
consulting engineers and project managers. The training of project managers and
construction companies’ contract administration staff in the FIDIC Conditions of
Contract and other contract documents is the starting point. Later the training will
be extended to consulting and design professionals. The proposed training
programmes will be open to participants from areas neighboring mainland China
the same training needs are emerging as in the mainland.
The Center is located in the Tsinghua campus, in Beijing; it is run by representatives
from CNAEC (the FIDIC member association in China) and Tsinghua University.
FIDIC guides, suggests and supervises the work and training plan of the Center;
it recommends experts for the lectures, provides related documents and materials
published by FIDIC (textbooks or reference books), and signs the certificates for
the trainees that complete the courses.
For these reasons, the Chinese consulting and construction community has kept
a close track of the development of FIDIC’s standard forms of contract. The new
suite of FIDIC Conditions of Contract became known in China almost immediately
9 China National Association of Engineering Consultants
272
The Contract in Successful Project Management
after its publication in September 1999, and has been translated into Chinese, as
authorized by FIDIC, by a panel recruited by CNAEC.  The translation was published
in May 2002 in Beijing.
Follow-up Activities of Chinese Academics and Practitioners to Promote Project
Management
Chinese scholars and practitioners have been active in various ways, seeking to
disseminate and promote modern project management knowledge and practice
since the 1990s. A Project Management Research Committee was formed within
the China Operations Research, Optimization and Mathematics for Economics
Research Society in June 1991 in Xi’an, Shanxi province. The Committee is a body
aiming to promote project management professionalism, and facilitate
dissemination and sharing of professional information on both a domestic and
international basis. The membership of the Committee encompasses the individuals
and bodies involved in project management, both academically and practically,
across various sectors.
The Committee publishes a half-yearly journal entitled Project Management,
beginning in 1993. It has held a number of national or international symposiums
or seminars since 1991. The Committee is interested in events held by the
international project management community. The Secretariat staff has represented
the Committee in a number of the IPMA annual conferences since the committee
became a member of IPMA in 1996.
The committee also produced a document entitled China’s Project Management
Body of Knowledge in 2001.  However, perhaps due to insufficient promotion
efforts, the Committee has not become as generally known as would be desirable.
At the proposal of a group of researchers, professors and government officials,
the State Economic and Trade Commission of China, in February 2001, launched a
project to develop a document that can be used as guidelines for project
management professionals to prepare for the certification examination that is
expected will be required in a few more years in China. This document is also to
serve as a common lexicon within the project management community in China
for talking, writing and communicating with the international community about
project management. The drafting panel is made up of researchers and professors
of the China Academy of Science and a number of major universities in Beijing.
The terminology, wording and organization of the document to some extent follows
the PMI’s PMBOK Guide. It is certainly true that the current economic and social
circumstances of China have been taken into account during the drafting of the
document. Comments and remarks were invited nationwide and across sectors
several times. The finalized document was published in April 2002 entitled Outline
of Project Management Body of Knowledge in China.
In order to further promote and raise awareness of project management needs,
and facilitate professional capacity building in all sectors of China’s economy, the
273
Appendix A
State Economic and Trade Commission, China Academy of Science, the State
Administration of Foreign Experts Affairs and UNIDO sponsored the First International
Conference on Project Management of China 24-26 April, 2002. Both international
and domestic project management communities and other interested people
responded to the call for papers very actively. Over 730 people either individually
attended or represented their organizations at the conference. They also attended
the seminars offered during the Conference.
The Chinese and foreign keynote speakers, without exception, pointed out that
effective project management is the key for China’s economy to grow healthily
and smoothly. The conference has demonstrated that project management is an
attractive and promising profession in China.
Project Management Education and Training in China
Construction project management as a management discipline is offered at both
graduate and undergraduate levels in a number of major universities such as
Tongji University at Shanghai, Tianjin University at Tianjin, Harbin University of
Technology at Harbin, Chongqing University at Chongqing and Tsinghua University
at Beijing.
However, Project Management per se has not been accepted by the Ministry of
Education as a management discipline, either at undergraduate or graduate levels.
As a result there is no university that offers formal project management education.
On the other hand, there have emerged numerous private firms that offer project
management training services in several major cities such as Beijing, Shanghai,
Shenzhen and Chongqing since 2001. The background for this is that more and
more private businesses, especially the Chinese subsidiaries of major multinational
firms, have realised that effective project management is essential for implementing
their business strategies. They encourage and financially support their employees
to attend project management training. Since the formal educational institutions
could not provide such training services, profit-driven private firms take full
advantage of the market needs. Their approach to meet the training needs is to
form a kind of joint venture with major universities. They advertise for participants
to enroll in their courses, and invite professors and sometimes project management
practitioners to deliver lectures to the participants. The training is carried out on
a part-time basis in most cases, usually on weekends. Most of the participants
are satisfied with the training courses and make positive comments.
Notably, the University of Management and Technology of Arlington, Virginia, USA,
has entered the training market in China. It formed a joint venture with Peking
University and offered a project management programme at graduate level leading
to a master’s degree in 2001. Forty-eight persons from various businesses in
Beijing have participated and finished their course work, and are now proceeding
with their thesis work. On completion of their work, they will submit their thesis
to a panel for appraisal.
274
The Contract in Successful Project Management
Contract Law in China
One of the key factors for construction project management to be successful is
the proper allocation of risks, rights and obligations risks among the principal
parties to the contract, i.e. the employer and the contractor. The forms of contract
are, therefore, prime tools to achieve the project objectives. The National People’s
Congress ratified the Contract law of the People’s Republic of China on 15 March
1999.10 This law governs all the contracts entered into within China’s boundaries.
Chapter 16 of the Contract Law covers the contracts for building and civil engineering
works.
The following is a discussion of the various aspects of contract and construction
project management in China.
Standard forms of contract
As described earlier, the FIDIC conditions of contract are used for works of civil
engineering construction and for mechanical and electrical works financed by the
World Bank and the Asian Development Bank. The concept and principles of the
FIDIC form have been accepted and used in construction projects by the construction
industry in China. The FIDIC conditions of contract as such, however, have not
been used for construction projects that are not financed by the international
financial institutions. Instead, the central ministries of China have produced their
own standard forms of contract for the domestic construction projects.
Prior to 1991, there were no standard forms of contract in China for construction
and the supply and erection of plant. The MOC and the State Administration for
Industry and Commerce jointly produced and published a standard form of contract
for works of building construction in November 1991, the Model Conditions of
Contract for Works of Building Construction (GF-91-0201).
After eight years in use, the GF-91-0201 has been modified, revised and renamed
by the same agencies. The updating was started in 1997, based on feedback from
the users, with reference to other standard national and international conditions
of contract, such as FIDIC’s, and the requirements of the laws on Construction,
Contracts, Tendering and other laws enacted up to date. The revised document,
the Conditions of Contract for Works of Building Construction (GF-1999-0201),
was published on 24 December 1999. The revised edition comprises three parts:
Part I-Form of Agreement, Part II-General Conditions and Part III-Conditions of
Particular Application. Part III prevails over Part II and comprises amendments,
additions and details required to modify Part II.
In addition to the Conditions of Contract for Works of Building Construction (GF-
1999-0201), the other central ministries have also prepared and published the
standard conditions of contract for the works of civil engineering construction
under their supervision. For example, the Ministry of Water Conservancy, the
10 Contract Law of the People’s Republic of China, enacted by the Second Session of the Ninth National People’s
Congress on March 15, 1999.
275
Appendix A
Ministry of Electricity and the State Administration of Industry and Commerce
jointly prepared and published the Conditions of Contract for Works of Hydraulic
and Water Conservancy Engineering Construction in September 1997. The Ministry
of Communications produced and published the Model Domestic Bidding
Documents for Procurement of Highway Works in November 1999. The conditions
of contract included in the model bidding documents are, by and large, similar to
FIDIC’s Red Book, Fourth edition, of 1987.
Contractual relationships
In China, a main contract is entered into between the employer and the construction
company as the general contractor. However, various other contractual relationships
are established in addition to the one that exists between the parties to the main
contract. Some of these will be mandatory, as required under the terms of the
main contract, and others will be optional. These relationships are described in
the following paragraphs.
Contractual parties to the main contract
Under the Conditions of Contract for Works of Building Construction ( GF-1999-
0201), the duties and/or obligations of both parties are specified as follows:
Contractor’s obligations:
• Prepares working drawings as required by the employer and at the employer’s
cost if the contract expressly so provides, and submits them to the Engineer for
approval (clause 9).
• Submits programme and progress reports to the Engineer (clause 9).
• Provides site office and accommodation to the employer at employer’s cost
(clause 9).
• Has regard for the safety and security of persons and property, keeps the site in
an orderly condition, and protects the environment (clause 9).
• Takes care of the works (clause 9).
• Executes and completes the works as specified in the Contract.
• Remedies any defects in the works (clause 34).
• Carries out the commissioning of the works (clause 19).
• Submits any claims to the employer within a reasonable time (clause 36).
• Provides necessary insurance (clause 40).
Employer’s obligations and duties:
• Appoints the Engineer (construction supervisor) (clause 5).
276
The Contract in Successful Project Management
• Gives possession of the site (clause 8).
• Supplies site and soil investigation reports (clause 8).
• Obtains all permits (clause 8).
• Hosts a meeting to brief the design of project (clause 8).
• Makes payments (clauses 24, 26).
Subcontractors
Where the employer or the construction company employs others to carry out a
part of the works, they are said to subcontracting out the works, that is, forming
separate subcontracts to the main contract by retaining the services of
subcontractors and/or suppliers. Under Clause 38 of GF-1999-0201, the main
contractor may subcontract out part of the works as specified in the accepted
tender and the agreement entered into between the parties. A copy of the
subcontract must be submitted to the employer. The main contract prevails if
there is an inconsistency between the main contract and the subcontract. The
subcontract does not relieve the main contractor from any liability or obligation
under the main contract.
Non-contractual parties to the main contract
Under form GF-1999-0201, the designer and the engineer involved in the design
and supervision of the works are not parties to the main contract. Each has his
own contract with the employer. Often such conditions of employment set out fee
scales. As none of the aforementioned is a party to the main contract, they are
not entitled to alter, in any way, the terms of the main contract itself.
Contractual arrangements
Contract arrangements in China fall into three broad categories, depending on the
means of arriving at the contract sum: lump sum contracts, measurement contracts,
and cost reimbursement contract.
• Lump sum contracts — In a lump sum contract, the contract sum is agreed in
advance, subject to possible increases or decreases as a result of variations
instructed by the architect/engineer in accordance with the contract. The sum
agreed upon may be fixed, or adjustments may be allowed for fluctuation in the
cost of labor and/or materials due to inflation during the contract period.
• Measurement contract — In a measurement contract, the contract sum is
ascertained by measurement and valuation related to bills of quantities or to a
schedule of unit rates included in the bidding documents.
• Cost reimbursement contract — In a cost reimbursement contract, the amount
to be paid is determined on the basis of the actual cost incurred by the
construction company in carrying out the works. An agreed amount is added to
277
Appendix A
cover overheads and profit. This is used where the requirements are only known
in general terms because of the nature of the work, such as repair of damages,
and/or because of an acute shortage of time. There are a few variants: cost plus
percentage, cost plus fixed fee, cost plus fluctuating fee and target price.
Dispute settlement procedure
The disputes that arise between the employer and the construction company
(contractor) can be resolved in various ways in China. Disputes Review Boards
(DRB) or Disputes Review Experts (DRE) have been used for the projects financed
by the World Bank, such as the Ertan Hydropower Station in Sichuan province.
At present, other dispute resolution methods are available to the construction
industry in China, including mediation, DRB, amicable settlement by negotiation,
arbitration and litigation. For example, GF-1999-0201 provides under Clause 37,
Disputes:
“Sub-Clause 37.1 If a dispute arises between the Employer and the
Contractor during currency of the Contract the matter in dispute may
be settled amicably between the parties or referred to the authorities
that have jurisdiction over the matter for mediation. If either party
or parties are not willing to resolve their dispute as above or the
dispute cannot be resolved as above the parties may agree an
alternative resolution method and include it in the Part III-Conditions
of Particular Application.
Alternative 1: the parties agree on arbitration and refer the matter in
dispute to the arbitrators appointed by them.
Alternative 2: sue to the people’s court of law that has jurisdiction
over the matter.”
However, in many cases the aggrieved construction companies will not offend the
employer, even if they are in a favorable position in connection with the matter in
dispute. The reason behind this is that the employers control the construction
market, since there are many more construction companies than are actually
needed at present in China. On the other hand, the majority of the employers
have a government background, directly or indirectly. If any construction company
dares to sue against the defaulting employer it puts itself at risk of greater
trouble and even losing future opportunities.
278
The Contract in Successful Project Management
279
Appendix A
Construction Joint Ventures in Asia — Lessons Learnt
Lu Youjie and Tan Wee Teck
Introduction
The nineties have brought renewed interests amongst western companies in the
Asian construction market. Until the Asia financial crisis in 1997, Asia was the
focal point of the international construction community. One Asian country after
another pursued economic liberalisation policies that attracted foreign direct
investments. Riding on the back of the foreign direct investments, the region
enjoyed a long spell of boom construction.
The economic setback since 1997 has dampened international interest in Asia,
but given the large infrastructure and housing needs of the continent, interests in
the Asian construction market will be sustained for a long time to come. The
economic revival of some of the Asian economies following the disastrous
September 11 terrorist attack in US bears testimony to the long-term potential of
major Asian economies like the Southeast Asian countries and China, including
the Hong Kong Special Administrative Region and Taiwan.
Asian Construction Companies
Asia is a large continent with many countries in various stages of economic
development. With the exception of Japanese and South Korean contractors, most
contractors in Asian countries are in the developing stages. The State-owned
Chinese contractors have good technical capabilities, but lack financial and
management resources to undertake international projects at the present time.
Until now the experience of mainland Chinese contractors outside their own country
has been mainly on direct aid projects funded entirely by the Chinese government.
Asian construction firms, except for Japan, South Korea and China, are largely
family-owned and managed. Family-owned companies are  cost driven and are
rarely competitive outside their own country. However, several large Malaysian,
Thai, Singapore and Hong Kong companies have broken into the international
market, led by second generation managers who have the benefit of a good
western education. Chinese construction companies have also begun to compete
in the regional markets.
The tallest building in the world, the Petronas
Twin Towers in Kuala Lumpur, capital city of
Malaysia. The towers were built by a
consortium of Japanese, South Korean and
Malaysian contractors.
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Joint Ventures
Joint ventures are a popular form of business collaboration, more so in the
construction sector because this sector is very heavily protected by many host
countries. Often government authorities make joint ventures with domestic
enterprises a precondition for foreign companies to win local construction projects.
As international joint ventures gain in momentum, however, voices of experience
urge caution: “Joint Ventures are dangerous” ... “Your partners will take your
technology and know-how and you will never see a profit” ... “The whole thing
fell apart and we spent years sorting out the mess”.
Cooperation where carefully crafted and managed is an excellent business strategy.
While words of caution should be heeded, they need not block greater use of
cooperative business arrangements. Instead past experiences, both positive and
negative, should serve to guide future joint ventures away from the rocky shoals
of insufficient business and financial planning, incompatible objectives, poor partner
selection, lack of management continuity and costly disputes, to a well-navigated
course for a clearly defined, mutually beneficial association.
General Characteristics of Joint Ventures
Joint ventures can be broadly classified into three categories.
1 Professional and Professional Joint Venture — This form of joint venture is
characterised by alliances of equals in management, financial and technical
capabilities. Most international firms and some leading local Asian firms come
under this category of partnership.
LKN Construction Pte Ltd (Singapore) and Aoki Corporation of Japan formed a
Joint Venture to undertake three elevated urban rail contracts in Singapore from
1985 to 1989. Aoki is a very experienced contractor and LKN matched their
foreign partner’s expertise by providing top-quality local staff led by their
Managing Director to complement the Japanese team. All three contracts were
very successfully completed and both partners were so satisfied with their
respective performances that they continued to work together to bid for many
more projects in Singapore.
2 Professional and Amateur Joint Venture — This is a common occurrence where
the international firm generally has strong all-round capabilities that the local
partner is not able to match.
Some clients especially government agencies in the developing countries try to
reduce the technological and management gaps between the local and foreign
partners by introducing technology transfer clauses in their contracts. In the
early phases of the Mass Rapid Transit contracts in Singapore, the Singapore
MRT Corporation made provision for technology transfer in their contracts and
even set up a Technology Transfer Department staffed by a Senior Manager to
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Appendix A
monitor the transfer process.  The Singapore contractors did not appear to
really benefit from this process. After some twenty years of MRT construction in
Singapore, most major MRT contracts in Singapore are still clinched by foreign-
led contractors.
3 Amateur and Amateur Joint Venture — This form of joint venture occurs when a
seemingly professional international party sends a third-rate team to lead the
joint venture team. Naturally in most cases, the local partner is inexperienced in
the handling of major projects. This type of joint venture is fraught with violent
quarrels amongst the partners, litigation and eventual termination of Joint Venture.
A Singapore consortium of contractors teamed up with three Belgian contractors
to successfully secure the two Singapore MRT contracts. Under the joint venture
terms, the foreign parties were supposed to provide experienced staff to the
joint venture. However, the local party later discovered that the foreign managers
provided by their partners had neither the necessary experience nor commitment
to manage the projects. This led to severe delays and cost over-run. After
several reprimands by the client, the joint venture eventually replaced the Project
Manager with a very able expatriate Manager, together with the replacement of
some key expatriate staff, and the project was subsequently completed.
Issues in Asian Joint Ventures
From interviews with major western and Japanese contractors operating in the
region and our personal experience we have identified three key issues with joint
ventures: management control, technology transfer and the keen interests amongst
Asian construction firms to act as sub-contractors to the joint venture.
Management Control
In an ideal joint venture, the management control and strategic decision making
are shared by both partners. However, in practice the local partner is often a
‘sleeping partner’ and the foreign partner becomes the final decision-maker. The
absence of one partner in the decision-making often leads to discontent. A leading
state-owned Chinese contractor found that when they joined the venture they
lost their independence; they could not make any decision and had nothing
except the legal position in the company.
Under a centrally-planned economic system, almost all decisions are guided by
the Government or Ministries, or high-level organizations. Responsibilities are
often taken by a group of leaders, not by the manager. However, the preferable
leadership style for decision-making in most companies is usually consensus-
based. Foreign managers are often very decisive; they want to be the only decision-
maker in the joint venture. The choice of an appropriate style of leadership for
the different levels of management is crucial for the joint venture’s success.
In the case of family-owned Asian construction firms, the owners are used to
having submissive managers under their employ and they are not used to trusting
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non-family members. When faced with independent-minded expatriate managers
from their joint venture partners, these owners often cede management control
and then become unhappy.
Technology Transfer
In any joint ventures between international firms and local firms, the local partners
invariably want to have access to their foreign partner’s technology. The local
partner may achieve this goal by driving hard bargains in their Joint Venture
Agreement, requiring the foreign counterpart to effect technology transfer. This is
sometimes aided by clients, particularly government clients, who stipulate
technology transfer requirements in their international contracts. For example the
Singapore Mass Rapid Transit Corporation incorporated technology transfer clauses
in their earlier contracts.
Compared with Japanese and South Korean firms, European and American firms
are more ready to share their technological know-how. However, for success, the
technology transfer process requires the cooperation of two parties — one party
to give and another party to receive the technology. In reality, few Asian firms
have really benefited from the technology transfer process in the construction
sector.
The Singapore Mass Rapid Transit projects have seen about 30 joint ventures
formed in the last twenty years, but to date very few Singapore firms have developed
the necessary technical skills to undertake MRT projects on their own. They are
still dependent on the foreign counterparts to lead the consortia in the current
phase of MRT contracts. One major impeding factor is that most Asian professionals
are impatient for success. The good local professional staff find they are quickly
moved to management positions because of the dearth of good professionals in
most developing Asian countries. During the construction boom the problem was
exacerbated by the shortage and the relatively fast turnover of managers, with
key decision-makers on both sides probably being replaced every three to five
years.
Partner as a Sub-Contractor
If they lose management control to their joint venture partners, most Asian
companies fight hard to get back into the ‘game’ by sub-contracting the simpler
structural, geotechnical and architectural finishing works.
The Singapore MRT contract works demonstrate the high level of sub-contract
work that the local partners secured in their joint ventures. The foreign joint
venture partner may frown upon this rather unusual arrangement, but in the
interest of maintaining harmony, most joint venture management give in to their
local partners. The JV Project Manager can find it difficult to manage sub-contractors
who are also JV Partners since, in many cases, the local partners place their self-
interests above the joint venture’s interests to the detriment of the project.
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Critical Success Factors in Joint Ventures
A successful joint venture can be defined as a “stable, healthy and profitable
business relationship that meets the needs of both partners”. Critical success
factors are well known to existing players, although they may not be so evident
to others, including potential new entrants. Identification of these factors is a
very difficult task.
Through a literature review and an overview of the many joint ventures in Singapore,
Hong Kong and Malaysia, potential factors relating to the success of joint venture
can be identified, including partner selection, negotiation and management control
of joint venture’s operation.
Partner Selection
Joint ventures often involve very complex issues concerning the external
environment, especially the legal and the political environment. The selection of
an appropriate partner is critical to the success of a joint venture. If the partners
do not understand each other well, the venture may be a disaster. Partner selection
is also important to performance since it influences the mix of skills and resources
that will be available to the venture and the joint venture’s ability to achieve its
strategic objectives.
One of the most successful partnerships we have experienced was the Sato Kogyo-
Maunsell partnership in the design-and-build Singapore East Coast Parkway elevated
highway project from 1977 to 1982. The key success factor was attributed to the
great care the Japanese main contractor exercised in the selection of key personnel
from the British consulting firm. At the tender stage, the Japanese contractor flew
a large team of engineers to London to select all the key design personnel, which
involved detailed interviews, setting out detailed scope of work and specifying
duration of services required for the key staff. The tender was successfully secured
and the execution of the project went very well despite the cultural and language
differences, not to mention the geographical distances.
The project was located in Singapore, with major designs being done in both
Tokyo and London. It is noteworthy here that even at a time when the fax machine
was still at a stage of infancy, a major project could be accomplished by a team
of engineers working in different parts of the world!
Negotiation
Joint Ventures differ from other forms of collaboration because they require
significant trust and negotiation. At start up joint ventures must address many
issues:
• joint venture duration;
• capital contribution;
• labour and social issues;
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• financial management;
• settlement of disputes; and
• conditions for termination.
All of these can be negotiated and improved to reduce the difficulties of doing
business. Good negotiation can increase the efficiency of establishing a joint
venture.
The main objective in negotiations is to determine the legal arrangements that
best satisfy the venture partners. Obviously one cannot expect to find a structure
that will satisfy all the objectives of the partners. An optimal joint venture can be
well-developed only by analysing the situation carefully and in detail.
In most parts of Asia where the legal framework is still not mature, the negotiation
process becomes more difficult. In addition, most Asian managers, who are directly
involved in the negotiation process, have insufficient skills and expertise required
for efficient negotiation, such as an understanding of the laws. Experienced foreign
partners who are successful negotiators in other countries, may find it difficult to
negotiate in joint ventures in developing regions in Asia such as China and Vietnam.
The key to success here is an understanding of the local customs and the people
as well as overcoming cultural barriers. These are tremendous obstacles for business
people doing business in a foreign country whose culture and language are different
from their own. Here are two examples that illustrate the importance of the
negotiation process to the success of a joint venture as a whole:
• A large Chinese state construction enterprise wanted to come to Singapore to
form a joint venture with a Singapore firm to undertake a major construction
project, but the negotiation almost fell through when the Chinese partner wanted
the Singapore party to guarantee that his mainland Chinese workers could
obtain the necessary work permit from the Singapore government to work at
the sites. As Singapore is a free economy, private firms have no influence on
government policy — unlike the Chinese state-owned enterprises. The Singapore
party could only promise to try to assist in the application for the work permits,
but could not offer any guarantees. Eventually, the Chinese party went ahead
with the joint venture only after lengthy deliberations on the subject, at times
reaching the point where both parties almost broke off the negotiations.
• A  joint venture between a group of three Singapore companies and a western
consortium of contractors, comprising two European and an American firm,
were constructing a major underground road project in Singapore in the eighties.
Shortly after the commencement of the project, the  joint venture discovered a
major mistake in the tender price. The local partners, who were counting on the
expertise of their foreign partners to price the contract, withdrew from the
project. The western consortium proceeded to complete the project at great
financial loss. The litigation that followed took many years to resolve.
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Appendix A
Management Control In The Joint Venture (JV)
Selecting the ‘right partner’ and having very good negotiation skills and a stable
and favourable business environment do not guarantee success. The day-to-day
management of a joint venture is a fundamental issue. In operating a joint venture,
problems happen in almost all the phases of management, like decision-making,
communication, changing organization structures, and so on.
Decision-making Process
East-Asian managers are guided by Confucian values, which emphasise stability
of society, harmony in family, and virtuous behaviour towards others. Asians are
group-oriented and personal-relationship oriented, whilst western management
is generally individualistic and result-oriented. This clash of management style
often results in less-than-happy partnerships. With growing experience in joint
ventures and more careful selection of JV Management staff, the gap has narrowed
considerably over the last few years.
Mutual Understanding of Cultures
Joint ventures require sensitivity to different cultures. Foreign companies should
provide language and cultural training for managers who will be working in the
host country.
Mutual understanding of different cultures helps improve the partner relationship,
avoid conflicts and thus supports the success of a joint venture. Part of the cultural
difference is the way people do business differently. Foreign managers should keep
in mind that forcing a change in local customs and practices is not beneficial,
practical or productive, because the Asian market has inherent characteristics.
Trust is highly respected in doing business, especially in Asia. Many joint ventures
were dissolved because the local partner discovered that their foreign partner
played tricks on them. Complaints of local managing partners of joint ventures
include the buying of second-hand and out-dated machinery that was of poorer
quality and more expensive than that available locally, and partners colluding
with their foreign suppliers.
Communication in the joint venture
Communication is especially important to any joint ventures, particularly where
language barriers add difficulties to the relationship between the foreign managers
and the local workers. Efficient communication within a joint venture is important
to ensure accuracy, quality and timeliness of information, which leads to everyone
understanding the business they are doing. Success can never be guaranteed,
but recognising the critical factors is always a significant help.
The Golden Rules of Partnership Management
Managing joint ventures is notoriously difficult; however, they can be made to
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work if a company approaches them in the right way. In numerous discussions,
with both Asian and western firms, the following principles of partnership
management were identified.
Plan Thoroughly
Whilst it may not be possible to write the same kind of operational plan for a
partnership that you can for a wholly-owned business, certain planning procedures,
can, and must, be followed if the desired goals are to be reached:
• prepare an outline of the activities undertaken within the partnership and the
resources required;
• agree on the staff recruitment criteria; and
• plan how the relationship is to be structured and managed to obtain optimum
benefit.
Accommodate Cultural Differences
The potential for cultural conflict abounds in joint ventures. Conflict can arise in
a number of different ways. There are differences between large and small company
management styles, differences between national business cultures, and differences
between established management styles of individual corporations.
Large companies tend to have complex structures with multiple tiers of
management, and they tend to have established procedures for making
management decisions. There are usually many different groups with an interest
in any given project, slowing down decision-making. In small companies, where
regular day-to-day contact between employees makes informal communications
the norm for exchanging information, decisions can be made quickly by just one
or two people.
In a Singapore MRT contract awarded recently, the client required the European
partner of a three-party joint venture, including a Chinese and a Singapore firm,
to submit a Guarantee to the Authority, whereby the European firm is bound to
complete the project on behalf of the joint venture in the event of any of the
other partners in the joint venture not being able to complete the project. This
requirement by the Authority was a precondition for the Award of the Contract.
The joint venture partners had little choice but to comply with the Authority’s
requirement. In turn the European firm required the other joint venture partners
to provide a Counter Indemnity, which they duly obliged. However, the European
firm’s legal adviser later required the Chinese party to have their Counter Indemnity
endorsed by the Chinese government because Guarantees given by Chinese
companies are not enforceable in China unless otherwise registered with the
Chinese Government. The Chinese partner was offended and took the requirement
of their European partner as a lack of trust. The European firm’s legal officers
stood by the legal position. It took several months before the issue was resolved.
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The legal department of the European firm and some of the ‘hawks’ in the European
firm’s head office were eventually persuaded to relax on the terms and the Chinese
party, after much persuasion finally registered the Guarantee with their government.
Establish Clear Strategic Leadership
Clear leadership is essential in any business or project, and one of the most
important aspects of structuring a strategic partnership is choosing the right
leader. Ineffective leadership makes coordination difficult and expensive; it slows
down development, and it can make it virtually impossible for important decisions
to take effect.
One way of creating strategic leadership is to have one of the partners take on
the role of project management. This is the easiest solution in major projects,
requiring the integration of complex inputs from many partners.
A consortium of Ways and Freytag of Germany, Econ International (Singapore) and
Chew Eu Hock (Singapore) won a design and construct contract from the Singapore
Land Transport Authority, for a complex elevated roadway and subway rail tunnel
for the Singapore Mass Rapid Transit North East Line in 1997.  The Project Manager
for the consortium was provided by Ways and Freytag. He was a very strong
technical manager with many years of working experience in Asia. He won the
trust of his Singapore partners with his leadership and the local partners left him
to manage the complex project to successful completion recently.
Learn Flexible Management
Companies involved in joint ventures must learn how to manage without the kind
of control to which they are accustomed. The degree of influence a company has
depends very much on the type of partnership and on the power balance existing
between partners. For example, a minority partner in a company that is doing
well has little or no influence over its management. On the other hand, a company
that is doing badly, and in need of capital, must listen carefully to its partner.
Companies involved in joint ventures must be flexible. Their managers must be
both diplomatic and astute. Companies must ensure all members of their team
understand the importance of working with the other partner constructively. At
the same time, the limits of co-operation must also be clear; sensitive information
must be identified and isolated.
In 1996, a Singapore contractor and a Chinese contractor formed a joint venture
to undertake construction of 625 dwellings in a public housing project comprising
four 20-storey apartment blocks and two 16-storey apartment blocks. The Chinese
company initially had the controlling share of 70%. The Chinese contractor was to
provide all the supervisory and labour personnel for the contract with the Singapore
party providing project management, administration and quantity surveying services.
Shortly after the commencement of the contract, the Chinese party encountered
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difficulty in getting Employment Passes for their professional staff to work in
Singapore. Their workers were also not able to obtain the work permits to work
because the local partner was unable to meet the Singapore government quota of
one local worker for every five foreign workers. The local partner did not have
enough local staff to earn the ‘quota’ for his Chinese counterparts to bring in his
workers. Both parties were able to reconcile the differences. The Chinese party
reduced their shareholding in the Joint Venture. More of the work was sub-contracted
out to other local firms and the problem was circumvented by the flexible response
of both partners to the problem.
Learn From Your Partner’s Strength
Every company has a different way of doing things. All companies can learn from
others. Strategic partnerships offer the opportunity to observe how another
company operates, for example how construction waste control is managed, how
overseas subsidiaries are managed, and even how remuneration packages are
determined.
Individuals involved in the joint ventures must be chosen for their receptivity to
new ideas, as well as their ability to disseminate what they have learned throughout
the organization. Internal seminars can be conducted to spread this knowledge
and special programmes can be created to evaluate the relevance of this knowledge
to the company’s particular circumstances.
Viva la Joint Ventures
Singapore commenced construction of its rail-based mass-transit systems in 1983.
As of Feb 2002, Singapore has about 100 km of operational heavy rail system.
The northeast line, which is due to be opened by the end of the year, will add
another 20 km of underground rail network to the system. More lines are being
planned and built. As shown in Table 2, every phase of the MRT civil engineering
works has included local and foreign joint ventures. There is a place for joint
ventures in construction business and this form of strategic alliance is here to
stay.
Conclusion
The pace of business innovation — not just technological innovation — is
accelerating. So companies must focus on better ways of staying ahead, on being
first to exploit new technologies and markets, and on continually finding new
ways of reducing operating costs through partnerships.
No company can expect to have all the resources — technical, financial and
managerial — to respond to this fast-changing environment quickly enough.
Acquisition is too inflexible and too unwieldy a tool to achieve every business
development objective.
Joint Venture offers an increasingly important response to this more complex,
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Appendix A
more urgent and less forgiving competitive environment. However, there are many
pitfalls for the inexperienced. It is often more difficult than managers first imagine
to deliver the business benefits from situations in which control is split between
two or more partners. Objectives and priorities can change over time. Nonetheless,
we believe that collaborations produce winners and more so in the highly complex
international construction arena.
Acknowledgement
We would like to acknowledge the contributions of many friends who have given
their time to be interviewed for this paper. They include Mr Chua Leong Hai,
Chairman of Hock Lian Seng Infrastructure Pte Ltd, Mr Lim Kong Chong, Chairman
of LKN Construction Pte Ltd, Mr Paul Lim, Mr Angus MacDonald, Mr Yang Guo
Xiang, Deputy General Manager of the Beijing Urban Construction Group, Mr T
Ishibashi of Sato Kogyo Co Ltd, Mr Yoo Keng Seng of Ways & Freytag; and the
many other friends who contributed towards the research of this paper but who
do not want their names to be published. We would also like to thank Mr Cheng
Kim Hua for his kind review of the paper and Mr Abdul Samad for assisting with
the editorial work.
Singapore MRT Projects L/F JV F JV
Phase 1 (1983 to 1989) 9 4
Phase 2 (1986 - 1990) 13 1
Woodlands Line (1990 - 1995) 2 1
Airport Line (1998 - 2001) 2 1
North East Line (1997 - 2002) 10 2
Marina Line Stage 1  (2001 - 2006) 2
Total 38 9
No JV Total Remarks
1 14 L/F : Local / Foreign JV
3 17 F JV:  Foreign Firms JV
2 5
2 5
5 17
2
13 60
Table 2: Singapore Mass Rapid Transit Projects civil engineering
works contracts
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291
Appendix A
Worley’s Project Risk Management
Patrick Tuohey
A: The Risk Management Process
Worley's Project Risk Management Process is based broadly on the Australian and
New Zealand Standard for Risk Management AS/NZS 4360:1999, fast becoming an
international benchmark standard in risk management.
In a formal workshop / brainstorming session, the key project players are assembled
to identify the risks to the project's success. The process concentrates on a
qualitative assessment of the project risks, and the development of a Risk
Management Plan to manage and control these risks.
The process involves the following steps:
1 Establish the Context
• the formal description of the context under which the risk session will proceed;
a written statement is agreed up-front by the players on the precise purpose of
the session;
• the identification of the key stakeholders in the project - typically, the key
stakeholders encompass a much broader group than the direct contract holders;
• the identification of key success factors (KSFs) for the project and of the needs
of the key stakeholders - by definition, a risk is anything that impacts on these.
2 Identify Risks
• a brainstorming/‘free-range’ session in which all possible project risks are
identified and logged, without reference to any evaluation criteria - an ‘anything
goes’ forum;
• as a safety net under the brainstorming session, a series of key-word checklists
are presented to the session to uncover additional risks.
• some of the possible sources of risk include:
— commercial / contractual
— management activities and controls
— property / assets
— socio-economic
— technology / technical
— security
— political / legal / environmental
— project execution / operational
— natural events
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— personnel / human behaviour
— business interruption
— public / professional / product liability
— financial / market
— occupational health and safety
— custody of information
3 Analyse Risks
• the risks identified are now categorised into broad ranges, based on a
consequence-likelihood matrix against criteria - numerical ranges are used for
both the consequence of a risk occurring, and the likelihood of it occurring.
4 Evaluate Risks
• the risk matrix provides a severity ranking of each risk into (a) extreme; (b)
high; (c) moderate; and (d) low categories. Generally, extreme and high risks
require immediate attention, while moderate and particularly low risks may be
accepted without treatment.
5 Treat Risks
• for extreme and high risks, a treatment plan is established in order to mitigate
the risk. Possible ways to treat risks include:
— accept risk
— avoid risk
— reduce the consequence of occurrence
— reduce the likelihood of occurrence
— reduce both the consequence and likelihood
• as an outcome of the risk treatment plan, a risk action plan is agreed describing
the required action, action parties and schedule for action completion.
6 Communicate and Consult
• the Risk Management Plan is communicated throughout the project team, to
get buy-in and agreement.
7 Monitor and Review
• the Risk Management Plan becomes an on-going strategic project management
tool, and is kept alive throughout the performance of the project..
B: The Risk Management Plan
The key deliverable from the Risk Management Process is a Risk Management
Plan, which includes the following documents:
• Project Risk Map
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Appendix A
• Stakeholder Risk Map
• Project Risk Register
• Risk Treatment Plan
• Risk Action Plan
These documents form part of the strategic project management process for the
project, and must be communicated throughout the project and monitored, reviewed
and updated progressively throughout the project life.
1 Project Risk Map
The Project Risk Map is a summary of the project risks categorised into the
agreed consequence and likelihood of occurrence — the Worley process uses
colour coding to allow easy identification of risk severities. Both before- and
after-treatment risk maps are produced.
2 Stakeholder Risk Map
Though not a requirement of the standard, Worley uses the Stakeholder Risk Map
to identify those stakeholders affected by each risk - even a low severity risk may
require some attention if it can have a significant effect on government, local
community, regulators, etc.
3 Project Risk Register
This is the register of project risks identified by the Risk Management Process,
and includes a brief description of the risk, its categorisation against the
consequence and likelihood of occurrence, and the resultant risk severity.
4 Risk Treatment Plan
For each risk, a description is given of the way in which the risk may be treated.
Options include the acceptance of the risk, the avoidance of the risk, or a reduction
in the consequence and /or likelihood of occurrence of the risk
5 Risk Action Plan
An action plan is developed for each treated risk, giving a broad description of
the action required, and optionally, the person responsible and the schedule for
completion of the action.
In the Worley process, the Project Risk Register, Risk Treatment Plan and Risk
Action Plan are combined into a single, colour-coded document. We find that this
is far more user-friendly for the project team, and helps to ensure compliance
with the process.
Examples of the Risk Management Plan documents are included in the following
pages.
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Extreme risk High risk Moderate risk Low risk
LEGEND:
Consequences
Insignificant
1
$50,000
Minor
2
$500,000
Moderate
3
$5,000,000
Major
4
$50,000,000
Catastrophic
5
$500,000,000
A (almost certain) 95%
B (likely) 80%
C (moderate) 50%
D (unlikely) 20%
E (rare)   5%
Li
ke
le
ho
od
No Description
Treatment
Before After
1
2
3
4
5
Losses due to increased gas price if Desal Plant not on time
There is a gap between salvage value assumed and finally liquidated amounts
Failure to deliver electricity at required reliability
Failure to deliver electricity within contract schedule
Failure to have regulatory approvals in place to meet contract schedule
35
36
37
38
39
Failure to meet noise regulations
Client ‘steps in’ to ensure plant reliability
Failure by client to pay its bills
Principal is unable to get back-to-back liabilities with Vendor
Principal is unable to get back-to-back liabilities with gas supplier
19
20
21
22
23
Uncertainty in OPEX estimate
No guaranteed MCD
No guaranteed total energy sales
Failure to deliver electricity of required quality
Failure to deliver electricity at required quantity
6 Client unilaterally exercises rights of early termination
15
16
17
Interest fluctuations between now and ‘final closure’
Corrosion in plant (particularly gas turbine air intakes) due to salt water spray
Errors in financial model
40
41
42
Client requires us to obtain ‘business continuance insurance’
Principal has little experience in plant operations
Failure to meet NOx regulations
47
48
49
Loss and delay due to inclement weather
Requirement for load bank testing
Ground conditions in proposed site require additional time and money
1
2
15 16
41
43 47 49
38 44
27 28 29
32 34 35
36 39 40
42 45 46
48
37
3 4 5
7 8 9
10 18 19
20 21 22
24 30
33
23 26 31
14 17
6 11 12
13
25
Figure 1: Sample Project Risk Map
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Appendix A
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Figure 2: Sample Stakeholder Risk Map
296
The Contract in Successful Project Management
N
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Figure 3: Sample Project Risk Register, Treatment and Action Plans
297
Appendix B
B Appendix B
This section includes summary biographies of contributors to the book, and details
of the organisations that supported the CAE Conference on The Contract in
Successful Project Management, held in Christchurch New Zealand in February
2002.
298
The Contract in Successful Project Management
299
Appendix B
Contributors
Sir Ian Barker
QC,  LL.D (Hon),  FAMINZ,  FCIArb.,  Chartered Arbitrator
Sir Ian Barker is President of the Arbitrators’ and Mediators’ Institute of
New Zealand. He is also patron of LEADR NZ, a chapter of the leading
Australasian mediation organisation. He retired as a Senior Judge of the
High Court in 1997 and is a member of the Courts of Appeal of Fiji,
Samoa and the Cook Islands. He currently practices as an arbitrator and
a mediator involving a wide range of commercial disputes.
Dr Martin Barnes
BSc (Eng), PhD, FICE, FCIOB, FAPM, FICES, MBCS, CIMgt, FREng
Martin Barnes is the Executive Director of the Major Projects Association,
specialising in the human aspects of project management, contracts and
risk management. He has been an independent consultant since 1996.
He has been responsible for a number of developments in engineering
and construction management techniques now widely used and was the
principal author of the New Engineering Contract (NEC).
Dr Nael Bunni
BSc, MSc, PhD, CEng, FIEI, FICE, FStructE, FCIArb, FIAE, MConsEI
Nael Bunni is a Chartered Engineer, Registered Chartered Arbitrator and
Conciliator.  He is Past President of the Chartered Institute of Arbitrators,
London, and of the Association of Consulting Engineers of Ireland. He
has acted as conciliator, arbitrator or chairman of arbitral tribunals in
disputes involving parties from over thirty countries.  He is the author of
a large number of papers and three books on contracts and insurance.
Professor John Burrows
PhD (Lond.), LLM (Canterbury University)
John Burrows is a Professor of Law at the University of Canterbury,
Christchurch, New Zealand, and a visiting Fellow of Clare Hall, Cambridge
University, England.  His areas of interest are Media Law, Statute Law and
the Law of Contract and he is the author or co-author of five textbooks
on these subjects. He is currently a member of the New Zealand
Government’s Legislation Advisory Committee.
300
The Contract in Successful Project Management
Professor David Elms
BA (Cambridge), MSE, PhD (Princeton)
David is a director of the risk management firm of Optimx Ltd and an
Emeritus Professor of Civil Engineering at the University of Canterbury.
He is particularly interested in the relationship between project contracts
and risk management. He is a Fellow of the Royal Society of New Zealand
and a Distinguished Fellow of the Institution of Professional Engineers,
New Zealand.
Derek Firth
LLB,  FAMINZ (Arb.), FCIArb, Chartered Arbitrator (UK)
Derek Firth is a barrister, arbitrator, and a director and trustee of a number
of companies and trusts. He has spent most of his professional life
working on the legal side of the construction industry and has represented
major construction companies in disputes in New Zealand, the Middle
East, Alaska, Singapore, Hong Kong, Australia and the South Pacific.
Ernesto Henriod
CEng, MSc (Eng), Dip Mgmt., MCIP, FICE, FIPENZ, MDRBF, AAMINZ
Ernesto is a civil engineer experienced in consultancy, contracting, owner’s
representative in projects, and development banking. He worked for 18
years in the World Bank, in positions ranging from a leading role in
procurement policy, to senior management. He is the author and  co-
author of books, papers and policy documents on construction and
management. He is currently a consultant, particularly in dispute prevention
or arbitration and mediation in civil engineering and building contracts.
He is also Advisor to CAE and the Asia Construction Academy of Singapore.
Dr Jason Le Masurier
BEng, MPhil, PhD (Bristol), CEng, MICE
Jason has recently been appointed as Senior Lecturer in Construction
Management at University of Canterbury.  He previously worked in the UK
construction industry for eleven years, with equal time spent in academia
and practice. He was recently a team member with the UK ‘Movement for
Innovation’, which promotes best practice and innovative approaches to
construction projects among clients and their supply chains.
Frank McDonough
PE, CEng, FICE, FASCE, MNSPE, MDRBF, MASPE
Frank is the CEO of the firm McDonough Bolyard Peck, which provides
services ranging from engineering design, infrastructure rehabilitation,
field inspection and project management services, to expert analysis of
construction disputes.  He has served as mediator in major contracts in
the USA, as chairman or member of Dispute Review Boards for several
projects, as an arbitrator, and expert witness in court cases.  His
international work includes projects in Bahamas, Nepal, India, Chile, and
Saudi Arabia.
301
Appendix B
Gay Pavelka
FAMINZ, MIAPP, Accredited Mediator, Community Mediation Service, ChCh
Gay is established in private practice, having mediated in community,
workplace and resource management disputes since 1984. She provides
services to a range of clients, including school boards of trustees, regional,
district and city councils, community groups and businesses, usually to
prevent the development of conflict or to problem-solve in specific
disputes.  She undertakes cases of resource management and those
involving non-environmental issues and has provided these services in
New Zealand and in the South Pacific region.
Dr Patrick Tuohey
FIEA, FIChemE (UK), MAACEI (USA), CPE (Australia), CE (UK)
Patrick has over 20 years experience in the resources industry, the last 18
years in the engineering contracting industry where he has served in a
number of key management, commercial and technical roles.  He has
been involved in some of Australia’s largest resource industry projects,
and has also held senior commercial and contract management positions
with major engineering corporations. He is a Director of Worley, with
direct responsibility for Worley Safety and Risk Management, the safety
and risk consultancy group of the firm.
Tan Wee Teck
Dip Eng, Singapore Polytechnic; BEng (Hons) Strathclyde Universtity
Wee Teck is currently Director of several engineering, construction and
consultancy companies in Singapore, notably the Shanghai Tunnel
Engineering Co (Singapore). He has experience working with Japanese
and Chinese firms, and has served other Asian countries in the development
of their construction industries, notably Sri Lanka.  Wee Teck’s experience
has covered a wide range of functions in strategic planning, project
management and construction.
Dr Suzanne Wilkinson
BEng (Hons), PhD
Suzanne has a civil engineering degree and a PhD in civil engineering
from Oxford Brookes University, UK, specialising in construction
management. She is currently employed as a senior lecturer in engineering
management at the University of Auckland. Her teaching and research
interests cover the areas of construction law, contract administration and
project management.
David Williams
QC, LLB (Auck), LLM (Harvard)
David is a Barrister at Law and Arbitrator, with over 25 years’ experience
in commercial litigation and arbitration.  He has extensive experience as
an arbitrator and mediator in New Zealand commercial issues and disputes
as Counsel or Arbitrator, and Counsel in numerous cases heard in the
Privy Council, London. David is the New Zealand representative on the
ICC International Court of Arbitration (Paris) and a member of the London
Court of International Arbitration (LCIA), and is Vice-President of the LCIA
Asia Pacific Council.  He is Vice-President (Arbitration) and Fellow of the
Arbitrators’ and Mediators’ Institute of New Zealand.
302
The Contract in Successful Project Management
Tim Wood
BEng,CEng, MICE, MIHT
Tim is Chief Engineer (Structures) for Cornwall County Council and Deputy
Project Manager for the Tamar Bridge Strengthening and Widening Project.
He manages a team of 45 who design, inspect and maintain 3700 highway
structures.  He has 16 years experience in civil engineering concentrating
on bridges and contract administration/supervision.
Lu Youjie
MSc (Tsinghua) MSc (New York Polytechnic Institute)
Youjie is a professor in the Department of Construction Management,
and a co-Director of the Centre of Project Management Studies and Training
of the Tsinghua University of Beijing. His research interests centre upon
construction project management, systems engineering, building
economics, project financing, and affordable housing.  He has an active
involvement in continuing education programs both within Beijing and
abroad.  Professor Lu is the author of 56 papers and 12 books on subjects
of his fields of expertise.
303
Appendix B
Contributing Organisations
Centre for Advanced Engineering
The Centre for Advanced Engineering was built
on a vision to broaden this country’s technical
knowledge for the benefit of all New
Zealanders. This CAE has done consistently
and successfully since its foundation in 1987.
Today CAE is at the forefront of the application
of engineering knowledge so as to develop
new perspectives and solutions. As an
independent non-partisan body, CAE is
uniquely well positioned to perform the four
roles of pioneer, integrator, knowledge broker
and awareness raiser.
But it’s not just about specialist knowledge.
There’s an art in getting people to come
together and produce the right mix of energy
and insight to find solutions to the issues of
the day.  Calling on academic and industry
expertise, CAE are able to encourage and
facilitate action on the emerging issues of the
day. CAE distributes the newly-created body
of knowledge through our website, seminars,
conferences and publications.
The Arbitrators’ and Mediators’ Institute of
New Zealand
AMINZ is the premier dispute resolution body
in New Zealand. Its members include
arbitrators, mediators, adjudicators,
conciliators, facilitators and expert witnesses.
The Institute is dedicated to promoting high
quality dispute resolution services by its
members to the public. The Institute is a major
co-ordinator of dispute resolution education
and its education programmes and professional
qualifications are recognised internationally. It
has close ties with many similar overseas
organisations.
304
The Contract in Successful Project Management
Project Management Institute New Zealand
PMI New Zealand is a chapter of the US-based
Project Management Institute (PMI). It currently
has 700 members, and is one of the largest
chapters of PMI outside North America. PMINZ is
very active in promoting professionalism in project
management and runs and promotes courses in
the Project Management Professional (PMP)
qualification for all members. PMINZ is also active
in working with other organisations in promoting
the highest standards of professional project
management.
The Institution of Professional Engineers New
Zealand
IPENZ is the Professional Society for 8,000
professional engineers in New Zealand. IPENZ
assesses competency of engineering practioners,
benchmarks and accredits New Zealand
engineering qualifications, encourages and assists
continuing professional development, and provides
awards and scholarships that recognise
achievement. IPENZ provides a widening range of
membership services. IPENZ also represents
engineers’ interests with government, provides
contact with other professionals through branches
and technical groups, and maintains a vigorous
publication and conference programme. IPENZ
promotes public debate on engineering issues
within the community, and seeks to contribute,
on behalf of the engineering profession, to
resolution of issues affecting the wider community.
305
Index
Index
A
AAA  205, 232
AAA International Arbitration Rules
1997  234, 243
Abrahamson, M  37
acceleration  178
accidents, organisational  45
ACE Form  214
ad hoc arbitration  232, 234
additional payment  74
adequate design  180
adjudication  88
procedure  169
adjudicator  3, 18, 27, 87, 88, 105,
167
adjudicator’s contract  86
ADR  6, 14, 18, 201, 251
techniques  202
advance contracts  139
advance payment security  258
adversarial approach  85
adversary  238
African Development Bank  124
agreed expert  103
agreement
to agree  10
to negotiate  10
alliance agreements  249
alliancing  59, 257
allocation of risk  9, 13
see also risk
alternative dispute resolution
see ADR
American Arbitration Association
see AAA
amicable dispute resolution  215,
226
AMINZ  ix, 3, 210
appointment of arbitrators  210
Araujo, A  124, 257
arbitral award  237
arbitral tribunal  205
Arbitration Act 1996, New Zealand
29, 204, 235
arbitration  14, 18, 88, 102, 103, 167,
172, 201, 203, 208, 215, 220,
222, 223, 238, 252
centre  262
procedures  205
arbitrator’s fees  206
Arbitrators’ and Mediators’
Institution New Zealand
see AMINZ
AS/NZS 4360  291
Asian construction companies  279
Asian Development Bank  26, 104,
124, 167, 261
Association of Consultant Architects
116
Association of Consulting Engineers
(UK)  26, 214
Australia  87
award of contract  124
B
Ballard, G  118
bank clearances  258
bankruptcy and liquidation  99
Barker, I  199, 252, 299
Barnes, M  21, 24, 27, 83, 109, 113,
251, 299
Barrett v IBC International Ltd  10
basic construction law  177
Bazalgette, J  26
benchmarking  128
bill of quantities  86
Blockley, D  iii, v
bonds  258
Booen, P  104
BOOs  259
BOTs  3, 261
Bowen v Paramount Builders  8
Bradshaw, J  171, 172
306
The Contract in Successful Project Management
brainstorming  291
breach of contract  66
Brindley, J  25
British Property Foundation  27
British Standard 4778  33, 65
Brunel, I  25
Building Act 1991, New Zealand  29
Bunni, N  21, 23, 26, 31, 33, 38, 46,
61, 66, 96, 100, 109, 120, 122,
145, 199, 213, 223, 248, 251, 299
Burrows, J  ix, 5, 250, 299
Butt, P  15
C
CAE  ix, 3
captive market  195
Carpenter, S  159
‘carrot and stick’ scenarios  4
case management  213, 223
conference  224
cash flow  189
catalytic role  262
Central Government Task Force  130
Centre for Advanced Engineering
see CAE
certainty  229
certificate of practical completion
184
certification  184
certification process  183
certifiers  184, 186
chairman  172
change orders  164
Channel Tunnel Rail Link  87, 121
Chapman, C  60
Chapman, P  168
China  87
China International Economic and
Trade Arbitration Commission
see CIETAC
China National Association of
Engineering Consultants  271
CIETAC  232
civil engineer  25
claim  73, 100, 102, 216,
clarity  85
Clendon, R  261
co-ordination  120
collaborative
approach  123
working  50
Commerce Act 1996, New Zealand
236
common law  5, 16, 21, 24
communication  15, 194, 285
Companies Act 1993, New Zealand
29
compensation  139, 187
event  87, 96, 101, 122, 140
concessions  259
conciliation  208
Conditions of Contract for Works of
Building Construction, China
274
confidentiality  203, 231
conflict spiral  159
Confucian Values  285
consortia  192, 287
Construction Best Practice
Programme  129
Construction Contracts Bill, New
Zealand  8, 19, 179
Construction Industry Arbitrations
246
Construction Task Force, UK  126
construction
disputes  220
disputology  213, 218
industry  213
joint ventures  125
‘lex mercatoria’  226
management  85
programmes  219
constructivist approach  249
consultants  2
contract
Build, Lease, Transfer  123
Build, Own, Operate, Transfer
123
Build, Own, Transfer  123
Build, Transfer  123
Build. Own, Operate  123
307
Index
definition  23
Design, Build, Finance, Operate
123
disputes  177
Engineer, Procure, Construct  123
failure  175
formation  57
price  80
securities  258
contract law in China  274
contracting in the UK
contractors  2
claims  74
obligations  275
risk  39, 77, 97, 248
contracts in China  265
contractual relationships  33
cooperation  10, 17, 280
cooperative relationship  238
Corbett, E  26
core values  145
corruption  125
cost
effective arbitration  225
reimbursable contract  86
reimbursement contract  276
restraint  225
savings  186
to complete  180, 183
Court of Appeal, UK  11, 238
Court of Arbitration  239
courts  16
Covey, S  111
critical success factors  283
cross examination  204, 224
cultural
barriers  284
differences  286
culture
change  109, 110, 126, 247, 253
change programmes  250
“them and us”  1
D
DABs  3, 18, 75, 104, 167, 222, 226
damages  12
Dark Ages  24
dealing with delays  138
decision-making  33, 85
decision-making process  285
declaration of acceptance  170
deemed variations  179
default  66, 99
defective work  187
defects  121
notification period  79, 80
delay  178
delegation  24, 70
demarcation disputes  205
Department of the Environment,
Transport and Regions  iii, vi, 113
design
and build contracts  112
build  29
build specification  182
by contractor  64
consultants  186
development  136
development process  181
error  77
obligations  71
risk  78
developing action plans  147, 152
developing countries  125, 257
Dezalay and Garth  229
Dispute Adjudication Boards
see DABs
Dispute Resolution Boards
see DRBs
Dispute Review Board Foundation
29, 168, 222
disputes  25, 102, 171, 172, 192, 194
avoiding  88
prevention  103, 247, 250
resolution   89, 199, 220, 247,
251, 262
resolution clause  207, 241
resolution methods  201
review expert  169
settlement  216
dispute resolution in New Zealand
201
308
The Contract in Successful Project Management
Disputes Review Boards  258
Disputes Review Experts see DREs
disputology  1, 218, 228
doctrine of consideration  9
doctrine of contract  7
DRBs  3, 28, 29, 89, 167, 168, 222,
251, 277
members  172
operation  170
DREs  277
DZ 3916  93, 106
E
early warning  101, 120
Economic Development Institute
268
Edwards, C  vi
Egan Report  127, 128
El Cajon Dam  28, 168
Electricity Corporation of NZ v
Fletcher Challenge Energy Ltd  10
electronic procurement  259
Elms, D  iii, iv, 300
employer  41
employer’s
fault  177
financial arrangements  69, 99
liability  65
representative  65
requirements  71, 77
risk  39, 66, 87, 97
enforceability  245
enforceability of arbitral awards
230
enforceability of awards  205
engineer  41
quasi-arbitral role  80
engineering and construction
contract  86
Epworth Hospital  180
Ertan hydroelectric project  171
European Development Bank  124
European Union  33, 131
evaluation of bids  184
evidence  224
evidence in chief  225
expert
neutral determination  203
reports  224
NZS 3910  250
extension of time  177, 258
extension of time for completion
101
F
facilitated discussions  159, 161
facilitator  159, 164, 251
factual matrix  11
Faculty and Institute of Actuaries  60
fast track  163, 195
faulty work  187
Federation of Civil Engineering
Contractors  26
FIDIC  5, 13, 17, 21, 95
4th edition 1987
Conditions of Contract (Red
Book)  269
Conditions of Contract  26, 61,
167
Construction Contract  63
EPC and Turnkey Contract  63
Green Book  63, 216
Guidance  169
New Green Book  64
New Red Book   28, 40, 63, 69,
216
New Silver Book  76
New Suite  vi
New Yellow Book   28, 40, 63,
69, 216
Orange Book  64
Plant and Design-Build Contract
63
Short Form of Contract  63
Silver Book   28, 40, 63, 216
Suite of Contract Forms (1999)
FIDIC-Tsinghua University Training
Centre  271
final and binding  103, 172
financial
arrangements  79
cost  162
incentive  142
309
Index
financiers  2, 183
financing charges  80
Firth, D  175, 177, 248, 300
fitness for purpose  70, 78, 123
flexibility  85
flexible management  287
flow chart diagrams  95
follow-up plan  155
‘force majeure’  73, 80
framework contracting  114
Fraser, I  ix
Freeflow Alliance  119, 249
frustration  73, 99, 161
functional contract neutrals  167
funding  183
G
Gardam, D  13
Gardiner, J  ix
GDP  iv, 2
Godfey, P  iii, v
good faith  16, 17, 189
good management  85
government employees  257
Grafton Gully project  119
grievance  189
gross domestic fixed capital
construction  2
Grove Report  37
guarantee, on-demand  71
guaranteed maximum price  29, 180,
182
H
Hammurabi Codes  21, 23
harmonisation  263
of bidding and contract
documents  259
Harris, W  13
Hartman, F  57
Hartmann, M  1
hazard  34
analysis  36
consequences  35
Health and Safety Executive (UK)
46
Health and Safety in Employment
Act, New Zealand 1992  29
hearing time  172
Heathrow Airport, Terminal 5  118
Heathrow Express project   46, 48,
49
Hendtlass, C  ix
Henriod, E  1, 21, 124, 157, 163, 167,
175, 189, 248, 250, 251, 252,
300
Hewitt, C  24
Holbrook, R  ix
Hong Kong  87
Hong Kong International Arbitration
Centre  232
House of Lords  10, 11
Housing Forum  130
Housing Grants, Construction and
Regeneration Act 1996  222
Hudson’s Building contracts  11
human factor  189
human resources  266
I
ICC  205, 230, 232, 242
Arbitration Commission  206
Commission on International
Arbitration  246
Court  234
Rules  233, 238, 243
ICE  3, 5, 13, 21, 60, 85, 95
Conditions of Contract  26
General Conditions of Contract
214
ICSID Tribunal  236
impartial entity  169
incentive scheme  139
incentives  121
INCIS project  iv
increased costs  192
indemnity  71, 102
and insurance  40
independent  111
indictment  190
Industrial Revolution  21
industrial era  26
industry standards  194
310
The Contract in Successful Project Management
information technology  259
Institute of Architects  13
Institute of Civil Engineers  see ICE
institutional arbitration  205, 232
insurance  73, 102
integrating design and construction
137
intent  9
Inter-American Development Bank
26, 124
interdependent  111
interim payment certificates  184
international
arbitration  204, 211, 213, 262
commercial arbitration  229
conciliation  229, 243
construction disputology  222
contract forms  26
development banks  124
mediation  243
International Bank for
Reconstruction and Development
see World Bank
International Centre for the
Settlement of Investment
Disputes  230
International Chamber of Commerce
see ICC
International Commission on Large
Dams  258
interpretation  15, 240
of contracts  11
Investors’ Corporation Scheme Ltd v
West Bromwich Building Society
11
IPENZ  ix, 3
issue resolution ladder  147, 151
J
Jaynes, G  104, 171
JCT  5, 13
Jergeas, G  57
Johnson, B  250
joint and several responsibilities
192
joint venture  125, 172, 192, 279
construction  125
types of  280
Judge Vinelott  185
Junior Books v Veitchi Co Ltd  8
jurisdiction  205
Justinian’s law books  24
K
Kariba Dam  46, 190, 191, 252
Kay, N  249, 253
Kennedy, W  159
Kennedy-Grant, T  93
Kerr, M  1, 228
key performance indicators  52, 114,
130, 259
L
labour only
contract  24
subcontracting  266
language  15
last resort  252
late supply by principal  98
Latham Report  126
Latham, M  126
law of contract  5, 7
LCIA  205, 232
Arbitration Rules 1998  234, 243
Le Masurier, J  31, 49, 109, 110, 247,
249, 250, 253, 300
lean
construction  128
thinking  128
legal proceedings  172
liability  65, 66
limitation of liability  73, 80
liquidated damages  177
litigation  88, 201, 203, 206, 215,
252
Lloyd, H  38
Local Government Task Force  123
local customs  284
Locke, J  25
London Court of International
Arbitration see LCIA
London Underground  87
lowest bidders  25
Lownds, S  49
311
Index
Lubuge Hydroelectric Station  265
lump sum  86
contracts  276
EPC projects  59
Lusk, H  24
M
M4I see Movement for Innovation
Macneil, I  118
management
contract  86
control  281, 285
Mangla Dam project  1, 120, 124
market-orientated clients  271
Master Builder’s Federation, New
Zealand  94
master builder  25
Matthews, M  168
maturity continuum  111
Matyas, R  168
McDonough, F  157, 167, 171, 251,
300
measurement contract  276
mediated settlement agreements
245
mediation  14, 18, 89, 103, 105, 167,
202, 208, 239, 251
mediator  28
Metropolitan Board of Works  26
Miles, R  118
mini-trial  203
Ministry of Construction, China  265
Ministry of Finance, China  268
Ministry of Works, New Zealand  177
Molineaux, C  221
Mona Oil Equipment of NZ v
Rhodesia Railways  10
monitoring of progress  121
Morell, D  190
motivation  85
Movement for Innovation  129
Mudford, P  ix
multi-project partnering  114
multi-tiered dispute resolution  238
multilateral banks  259, 261
Murphy v Brentwood DC  8
mutual goals  145
mutual understanding  285
N
National Building Contract - General,
1998  94
NEC  vi, 3, 6, 17, 21, 27, 83, 85, 88,
95, 116, 139, 167, 185
partnering  131
programme  139
negative language  161
negligence  16, 66
negotiation  201, 239, 252, 283
process  284
neutral  3, 28, 105, 157, 159, 167
party  88, 250, 262
neutrality  229
New Austrian Tunnelling Method  48
New Engineering Contract  see NEC
New South Wales Supreme Court  15
New York Convention  205, 214, 226
New Zealand  87
Construction Contracts Bill  179
Court of Appeal  8
Institute of Architects  94
Law Commission  237
Ministry of Works  177
Standard Conditions of Contract
91
non-confrontational approach  96
non-contractual relationships  249
non-performance risk  98
not foreseeable physical
obstructions or conditions  72
notice  74, 218
notice provisions  216
NZ Standard  33
NZS 3910  vii, 17, 18, 29, 93, 242
NZS 3915  94
NZSS 623  17
O
objectives  150
observational
contracts  25
method  v, 47, 49, 53
312
The Contract in Successful Project Management
on-demand guarantees  258
open-ended contractual terms  9, 16
output-based contracts  259
owners  2
P
partner selection  283
partnering  iii, 18, 24, 29, 113, 124,
132, 164, 194, 257
agreements  109, 119, 145, 164,
charters  120, 147, 148, 249
contracts  115
evaluation  155
leaders  147
workshops  134, 147
partnership management  285
Pavelka, G  157, 159, 250, 301
payment certificate  75, 80
payments  14, 140
Peck, R  48
performance  187
evaluation  147
security  71
performance-based contracts  29,
259
plain drafting  16
planning procedures  286
PMINZ  ix, 3
pooling of resources  125
position papers  172
possession of works  14
Powerham, A  49
PPC2000  116
Pratt Contractors v Palmerston
North City Council  7
prequalification  259
prevention  165, 167
prevention/cure boundary  251
principal’s
representative  94
risks  101
private sector  261, 262
privately funded projects  58
problem solving  139
procedural
flexibility  231
rules  170
process integration  129
procurement  132
guidelines  184, 257
legislation  125
of works  265
professional services contract  86
professional skill  185
programme  101, 178
lending  261
partnering  114
‘programmatic Band-Aid’  164
progress
payments  179, 180
reports  71, 79
project
charter (example)  145
charter  135, 147
company  122
culture  53, 249
management  85
management capability, China
267
management in China  265
management team  268
manager  87
office  141
risk management, Worley  291
risk map  292, 292
risk register  293, 296
Project Management Body of
Knowledge, China  272
Project Management Institution New
Zealand  see PMINZ
promise  23
public relations  141
Pyne Gould Guinness Ltd v
Montgomery Watson  12
pyramid of contracts  7
R
R M Turton & Co v Kerslake and
Partners  8
Rankin, W  49
readability  95
realist approach  249
313
Index
Reason, J  45
reasonable (qualification)  99
recommendation  170
Registered Master Builders
Federation, New Zealand  94
‘relationship-based’ contracts  iii
remedies  12, 14, 187
Rennie, J  25
repair work  121
resolution ladders  250
resolving problems  147, 152
responsibility  65
and liability  39
‘Rethinking Construction’  126, 253
reverse cascade  164
risk  65
action  293
allocation  37, 123
analysing  56
and project management  45
apportionment  96
AS/NZS 4360 (standard)  55
concept  33
cultivation  219
cultural  45
currency  123
definition  33
economic  43, 70
evaluating  36, 56
identifying  56
in construction  43
management  iv, 31, 36, 47
management plan  292
management process  55, 291
measurement  35, 46
of cost over-runs  100
of delay in performance  100
of injury and damage  97
of non-performance  98
organisational  45
political  123, 262
probability of occurrence  36
quantification  36
sharing  33, 121, 140
time  43
treatment  56, 96, 293, 296
treatment action plans  296
Roberson, G  23
Roman Empire  24
rules
for adjudication  218
of court  206
of natural justice  225
S
Sample Bidding Documents  167
scope of contract  182
security bid  258
Seppala, C  104
Simmons, B  223
simplicity  95
Singapore Court of Appeal  184
Singapore International Arbitration
Centre  232
site
conditions  191
visits  170, 172
Small, F  iv
Smart, J  15
Smeaton, J  25
Smith, L  23
Smith, R  168
sovereign immunity  230
special referee  181
special risks  80
specifications  181, 193, 194
Sperry, P  168
spirit of collaboration  173
stakeholder risk map  293, 295
Standard Bidding Documents  26,
27, 28, 167, 259
Standard Condition of Contract, New
Zealand  91
Standard Conditions of Contract,
2000  94
standard forms of contract  12, 221,
249, 274
Standards New Zealand  107
State Economic and Trade
Commission, China  272
State Planning Commission, China
266
state-owned enterprises  266
314
The Contract in Successful Project Management
statute  19
Stephenson, R  25
Stockman, W  ix, 46, 109, 112, 250
strategic leadership  287
structural adjustment lending  261
subcontract  86
subcontractors  8, 266, 276, 282
sufficiency of tender  72
supervision  186, 194
supply chain  137
supply of components  193
Supreme court of Victoria  180
surety bond  71
Sutcliffe v Thackrah  14
Swiss Supreme Court  242
synergistic approach  249
T
Tamar Bridge widening  109, 131
Tan, W  125, 265, 279, 301
target contracts  29, 192
cost  86
cost contracts  248
teamwork in design  135
technology transfer  282
Telford, T  25
tender
price  284
process  7
Terminal 5, Heathrow Airport  118
termination  14, 102
for convenience  79
Thames Water  116
Thomas, J  11
Thorn v London Corporation  8
time
extension  14
for completion  74, 217
traditional forms of construction
contract  61
training needs, China  270, 273
transactional contracts  118
transparency  125, 257
Trollope & Colls Ltd v North West
Metropolitan  9
trust  125, 285
Tsinghua University  269
Tuohey, P  31, 55, 248, 253, 291,
301
U
Uff, J  225
UK Construction (Design and
Management) Regulations 1994
33
uncertainty management  50
UNCITRAL  232
Model Law  229
Rules  204, 234, 243
understanding of laws  284
unexpected obstacles  191
unforeseen ground conditions  25,
123
United Nations Commission on
International Trade Law
see UNCITRAL
US National Committee on
Tunnelling Technology  168
V
valuation  179
value
engineering  101
management  128
Varady, Professor  238
variations  14, 16, 96, 120, 164, 179,
181, 195, 258
Victorian Government  57
virtual company  119
W
Walford v Miles  10
Walker, D  66
Wallace, D  11, 13, 15
Ward, S  60
Washington Convention  230
Water and Power Development
Authority, Pakistan  124
West Coast Mainline, UK  115
Wilberforce, Lord  7, 226
Wilkins & Davies Construction v
Geraldine Borough  9
Wilkinson, S  91, 250, 301
Williams v Roffey Bros & Nicholls   9
315
Index
Williams, D  199, 252
witness statements  224
Wolf, Lord  1
Wood, T  109, 302
Woolf Reforms  206
working relationship  161
workshop  291
World Bank  2, 26, 104, 124, 168,
171, 184, 257, 265, 268
Headquarters Building  163
SBDs  169
Worley  291
X, Y, Z
Xiaolangi hydroelectric project,
China  171
Youjie, L  125, 265, 279, 302
Zack, J  57
316
The Contract in Successful Project Management
BLANK