SOCIETY OF CONSTRUCTION LAW

NEW CONSTRUCTION CONTRACTS: THE IRISH EXPERIENCE

2 October 2007 National Liberal Club,

London

William E. Gladstone (1869)

“I am oppressed day and night with the condition of Ireland, with the sad and painful spectacle it exhibits to the world …”

Celtic Tiger

• 13 years of strong growth• Fastest growing economy in Western Europe• Second wealthiest economy in Europe on a per

capita basis• Fastest growing population in Europe

> 20% growth in fifteen years• Construction output growth c.10% per annum since

1994• House construction

– c. 25,000 in 1994– c. 93,500 in 2006

National Development Plan

• “Transforming Ireland - a Better Quality of Life for All”

• Investment of €180 billion over 7 years

National Development Plan Key Themes

• Tackle infrastructural deficits• Encourage enterprise sector• Recognize that economic and social progress are

interdependent• Balanced regional development• Protection of the environment• Innovative and integrated policy development

National Development Plan Construction Industry

• Capital investment in infrastructure and building – €78 billion

• Upgrading roads and other areas of public transport

• Investment in air transport facilities• Strategic port facilities and harbours• Increased Government capital investment –

average €11 billion per annum

Transport 21

• Plan to transform transport network in a 10 year financial framework

Transport 21 – Key Statistics

• 9.4 million per day for transport for 10 years

• 170 million extra public transport users

• 75 million extra suburban rail passengers

• Central Dublin to airport metro

• 80 million light rail and metro passengers per annum

• 7 new light rail projects

New Government Contracts

• Reform construction procurement

• Greater cost certainty at contract award stage

• Value for money

• More efficient delivery of projects

New Government ContractsGuiding Principles

• Tender price and final outturn cost to be the same • Optimum transfer of risk to the Contractor• Risk transfer dependent on provision of detailed

information

Reform

Reform approach to public works projects

“… to achieve optimal risk transfer supported by good quality information to help achieve greater cost certainty, better value for money and timely and more efficient delivery of projects.”

[Charlie McCreevey, Minister for Finance, December 2003]

Risk Transfer

How do the new forms measure up?

“There is a growing realisation that it is often in the Principal’s interest to ensure that the project risks are not simply passed down the chain but instead there is some degree of ‘risk optimisation’ or efficiency in risk allocation”.

[John Baartz and Nick Longley, Allens Arthur Robinson (2003)]

Abrahamson Principles

A party should bear a construction risk where1. the risk is in his control, or

2. he can transfer the risk by insurance or spread it directly and it is most economically beneficial and practical to do so, or

3. the preponderant economic benefit of running the risk accrues to him, or

4. placing of the risk is in the interest of efficiency, or

5. if the risk eventuates, the risk falls on him in the first instance and it is not practical to transfer the risk

Max Abrahamson

“At least it is best to work from declared principles rather than undeclared and perhaps unconscious prejudices”

New Contracts

• Civil engineering works designed by the Employer• Civil engineering works designed by the Contractor• Building works designed by the Employer• Building works designed by the Contractor• Minor works contract

Guidance Notes

“These contract reforms are a key part of value-for-money Government initiative that is wide ranging and will impact on all three stakeholders (the client, the consultants and the contractors) in the delivery process for capital projects”.

Risk Transfer

How do the Contracts deal with allocation of responsibility and risk:• Programme/Progress Reports• Delay and Disruption• Insurance and indemnity• Specialist contractors • Price variation• Arbitration

Programme

“…of quality that will permit effective monitoring of the works …”

Onerous requirements must include details of• when instructions are required• sequence and timing of work• when Contractor’s Documents will be submitted• methods of execution and temporary works• estimate as to when personnel, equipment etc., will be on site• work which is the Employer’s responsibility• current critical path, critical resources, floats and other flexibilities• last review of programme logic and durations• anything else required by the Works Requirements

Progress Reports and Notices to E.R.

• Monthly progress reports – full details on status, personnel and equipment, instructions required, delay occurring, accidents etc.,

• 10 days notice to E.R. of any required instructions

Delay Events

• Delay caused by Employer or Employer’s Representative (12 events)

• Loss or damage to the Works at Contractor’s risk• Weather event• Strike or lock-out• Delay caused by court order or action by public authority• Archaeological finds• Unforeseeable ground conditions (not in D&B)• Unforeseeable utilities (not in D&B)• Failure by owners of utilities to relocate or disconnection

Compensation Events

Compensation payable for• Delay by Employer or E.R. • Optional events

Compensation Events – Optional

• Archaeological find• Unforeseeable ground conditions (not in D&B)• Unforeseeable utilities (not in D&B)• Failure by owners of utilities to relocate or

disconnect utilities• Errors in bill of quantities (greater than €500 per

item) (not in D&B)

“Unforeseeable”

“A condition, circumstance or occurrence is unforeseeable if an experienced contractor tendering for the Works could not have reasonably foreseen it … having inspected the Site and its surroundings and having satisfied itself, insofar as practicable and taking into account any information in connection with the Site provided by the Employer …”

Project Contingencies

Contractor to include in Contract Sum and Programme Contingencies for delays caused by Compensation Events• First threshold – no EoT• Second threshold – 50% EoT

Compensation EventsEntitlements

• Adjustments to Contract Sum– value of any additional, substituted and omitted

work• Delay cost

– delay cost as tendered by the Contractor• Notice is condition precedent to entitlement

Limitations

• Clause 10.1.2

“The Contractor’s sole remedies for a Compensation Event shall be those stated in the Contract.”

• Clause 10.7.4“… [notwithstanding anything else in the

Contract] losses or expenses arising from or in connection with delay, disruption, loss of productivity or knock-on effect shall not be taken into account or included in any increase in the Contract Sum and the Employer shall have no liability for such losses or expenses”.

Loss / Damage / Injury

Employer bears risk of• war, invasion, etc.• pressure waves caused by aircraft etc• contamination by radioactivity, hazardous

substances etc• terrorism (only if permitted exclusion under

Contractor’s insurances)• use or occupation of the Works by Employer

Care of the Works

Contractor bears risk

• Starting Date to Substantial Completion

• After Substantial Completion for– Defects– prior occurrences– its own activities

Contractor’s Indemnity

Contractor to indemnify Employer against

• liability

• loss or damage to property

arising from Contractor’s performance or non-performance of the Contract

Employer’s Indemnity

Where

• caused by Employer’s negligence

• property damage is “unavoidable result” of carrying out the Works

Does not extend to death, injury etc., to Contractor’s Personnel

Insurance

• Contractor to maintain – insurance of the Works– public and employer’s liability insurance– PI insurance (if required)

• “Co-insureds” – PL and insurance of the Works– cross liability clause– waiver of subrogation

Specialist Contractors

• No longer any nominated sub-contractors• No prime cost sums• No provisional sums • Replaced by specialist for whom Contractor is fully

responsible

Sub-contractors and Specialists

Specialist defined as:• Sub-contractor or supplier of work items and

named in the Contract• Contractor Personnel who do or are to do design• Contractor’s Personnel stated in the Works

Requirements to be Specialists

Specialists

Contractor input only• Contractor input only - named in Works Proposals

Employer’s input only • Named in Works Requirements• Employed by Employer under separate contract

Contractor and Employer Input• Alternative specialists proposed by Contractor

Specialists

• Contractor will submit Specialists for suitability assessment either at prequalification (in restricted procedure) or with its tender (under an open procedure)

• If Specialists named in Works Requirements Contractor must engage and identify them in its tender

• Novation where Specialist already engaged – contract transferred to the Contractor

Specialists

• Contractor responsible for work (and design) a Specialist – “shall ensure” performance

• Collateral Warranty to be provided (if required)• Payment withheld if warranty not provided on time

Price Variation

Two methods of calculation• PV 1 – proven cost method – based on

invoices

• PV 2 – formula fluctuations method

Price Fluctuation Provisions

• Price fluctuation free period– PV 1 - 30 months from Contract Date– PV 2 - 36 months from designated date/recovery date (6

months for tender assessment)

• Recovery date = designated date corrected for Contractor’s delay in commencement of Works

Price Fluctuation Provisions

• Contractor recovers– Price fluctuation as calculated under PV 1 or PV

2– Changes in law after Designated Date– Hyper-inflation – 50% increase in a month (by

reference to the greater of the price at the Designated Date or the start of that month)

Termination by Employer

• Contractor’s default

• Contractor’s insolvency

• Employer’s election

• Reference to conciliation– 21 days– recommendation– if reversed by arbitrator – treated as termination

at Employer’s election

Dispute Resolution

• Conciliation

• Arbitration

Arbitration

• Any opinion, certificate, determination, assessment or objection of the Employer’s Representative may be revised except decision stated in Contract to be “conclusive” – e.g., – Value engineering proposal– Rejection of Defect

Ian Duncan Wallace Q.C. (1982)

“Only if the assumption of a risk by a contractor is likely to be self-defeating … causing increases in tender prices out of all proportion to any corresponding advantage conferred on the Employer, is an impartial adviser entitled to counsel that employers should bear that risk”

New Government Contracts

• The experience so far• Keating on Building Contracts

“The alternative policy of requiring Contractors to accept most of the risk of unforeseen contingencies at tender stage would be likely to result in tenders at higher rates or widespread insolvency among Contractors. Neither of these would be in the long-term interests of Employers.”

William E. Gladstone

“No man ever became great or good except through many and great mistakes”

SOCIETY OF CONSTRUCTION LAW

NEW CONSTRUCTION CONTRACTS: THE IRISH EXPERIENCE

2 October 2007National Liberal Club,

London