In Construction Contracts

FORUM David Yates Department of Real Estate and Construction, University of Hong Kong. (E-mail: [email protected]) Abstract Introduction The topic of this paper is claims and disputes in To consider a response to the above question it construction, mainly from the perspective of the is necessary to reflect upon the possible causes client in the context of the client/contractor of claims and disputes and the extent to which relationship. The causes of claims and disputes those causes can be addressed. are examined from the perspective of transaction A review of the literature reveals confused cost economics (TCE) theory due to its focus on usage of basic terms. The terms “conflict” “claim” contracting problems and in particular its and “dispute” are used separately or in pairs and suitability for complex, long-term and dynamic frequently without clear indication of the precise relationships which are found in construction meaning of each use. There is often a lack of contracts. Consideration of TCE theory in the clarity as to whether the researcher is referring to context of construction suggest that the root “claims” per se (i.e. claims which are resolved causes of conflict, claims and disputes are: between the parties and do not therefore become – Contractual incompletedness; and disputes), to “disputes” (i.e. those claims which consequent “post-contract” adjustments. are not resolved and graduate into disputes), or – Asset specificity, mainly in the form of the to both “claims and disputes” (that is, the “conflict client’s investment in respect of purchase/ spectrum” — see Figure 1). assembly of the land for the project and the costs A number of writers, however, adopt similar of design/construction. broad definitions for these terms. – Opportunistic behaviour, in particular on Gardiner and Simmons (1992) define conflict as the part of the contractor. “any divergence of interest, objectives or priorities A brief case study drawn from Hong Kong’s between individuals, groups or organisations”. Airport Core Programme is used to illustrate the A claim is defined by Powell-Smith and presence of contractual incompletedness and Stephenson (1989) as “an assertion of a right to opportunism. Measures for preventing/reducing money, property, or a remedy and can be made the incidence of claims and disputes are under the contract itself; for breach of the contract, proposed. Conclusions are drawn that the actual for breach of a duty in common law; or on a incidence of claims and disputes is largely quasi-contractual basis.” governed by the client in determining the balance A dispute is defined by Brown and Marriot of his priorities for the project and his consequent (1993) “as a class or kind of conflict, which selection of procurement system, and design manifests itself in distinct, justiciable issues. It and construction teams. involves disagreement over issues capable of Keywords: Conflict, claims, disputes, resolution by negotiation, mediation or third transaction cost economics. party adjudication.” June 2003 Building Journal Hongkong China FORUM Brown and Marriot also cite the definition point in time when he becomes aware that the given by D. Foskett QC in The Law and Practice relevant event has occurred and a potential of Compromise: “An ‘actual’ dispute will not claims situation exists, even though the Architect/ exist until a claim is asserted by one party which Engineer may be unaware of it. However, for all is ‘disputed’ by the other.” (Brown and Marriot practical purposes, and certainly of the purposes 1993) of this paper, it is assumed that the genesis of a In similar vein Fenn et al (1997) suggests that claim and a conflict are synonymous. “Conflict exists where there is an incompatibility Figure 1 combines these definitions of conflict, of interest. When a conflict becomes claim and dispute and illustrates the “spectrum irreconcilable and the mechanisms for avoiding of conflict” which ranges from the notification of it are exhausted, or inadequate, techniques for a claim at one end of the spectrum, to the resolving the dispute are required.” resolution of a dispute at the other. Kumaraswarmy and Yogeswaran (1997) refer The “intensity of conflict” curve illustrates the to the UK Institution of Civil Engineers arbitration increasing strength and intensity of feeling procedure which states: “A dispute can be said between the parties as the conflict progresses to exist when a claim or assertion made by one through the various stages of a claim which, if party is rejected by the other party and that unresolved, develops into a dispute and proceeds rejection is not accepted.” through the various dispute resolution stages Combining these definitions with relevant until it is ultimately resolved. (A model depicting terminology in standard forms of contract and the increasing cost of a conflict through the same recognised construction industry practice, it stages would be more or less identical to the could be said that a conflict occurs at the same “intensity of conflict” curve). point in time as when a notice of a claim is given and exists until the claim or dispute is resolved. Causes of conflict, claims and disputes: It is, of course, theoretically possible that a a transaction cost economics perspective claim submitted by the contractor and In recent years, four studies in particular: Doree immediately accepted and agreed to, without (1994), Alsagoff (1996), McDermott and Alsagoff amendment, by the Architect/Engineer would (1996) and Yates (1998) discuss the application not necessarily give rise to conflict. Equally, it of transaction cost economics (TCE) theory to could be argued that a conflict comes into the issue of causation of conflict, claims and existence in the mind of the Contractor at the disputes in construction. This approach suggests that the root causes of Figure 1. The Spectrum of Conflict conflict, claims and disputes are contractual incompletedness and opportunism in the presence of asset-specificity. Contractual Incompletedness Many contracts which take place over an Intensity of Conflict Curve extended period of time can be described as Intensity incomplete in the sense that, at contract formation of Conflict (ex ante), the obligations of the parties cannot be fully and unambiguously specified to take account of all future “states of the world” which may be encountered during contract execution (ex post). In theory, a construction project tendered on the basis of a fully completed design Time (or, in the case of design/build procurement, a full and precise statement of the Employer’s Requirements), having no errors or omissions in Claim Dispute tender documentation and requiring no changes or variations during the construction phase, could be described as a “complete” — that is, fully Conflict contingent — contract. Building Journal Hongkong China June 2003 FORUM In reality, however, in view of the complexity Complexity of the construction process and time necessary The complexities of construction compared with for overall delivery, all but the smallest of projects other industries (particularly manufacturing) are are inevitably incomplete. summarised by Casson (1987): In “traditionally” procured projects contractual • Unlike most manufacturing, construction incompletedness is usually manifest in one or output is normally a sequence of “one-off” more of three categories: projects each of which is customised because of 1. At contract formation stage in the form of the requirements of the particular client and the Prime Cost Sums (PC Sums), Provisional Sums, idiosyncratic constraints of the particular site. Provisional Quantities, and the like, all of which • Most construction work takes place “out are “adjusted” during the construction phase of doors” and is, therefore, subject to the vagaries depending on the client/design team’s actual of the weather. In this respect construction is like requirements. other weather-related activity such as agriculture 2. A contractual mechanism — namely, the and tourism. right to instruct variations — which allows the • Intermediate inputs are immobile. The client/design team optimum flexibility in division of labour within construction creates decision-making (either by leaving decisions as many separate tasks within the production late as possible and/or changing decisions made process. Different tasks call for different specialist previously). skills, as in manufacturing. However, unlike 3. Ambiguities, errors or omissions in the ex manufacturing, most of these tasks have to be ante contract documentation, which come to carried out on the same site, because their light ex post, necessitating clarification of the output is embodied continuously and directly client/design team’s requirements and leading into the structure. Subcontractors do not, to ex post “adjustments”. (Usually classified as therefore, work on their own premises but on the variations.) main contractor’s premises. Moreover, they work According to TCE theory there are three factors in close proximity to each other. Unlike which give rise to contractual incompletedness: manufacturing, therefore, subcontractors work bounded rationality; risk and uncertainty; and “under the eye” of the main contractor and complexity. “under the feet” of other subcontractors. • Construction is labour intensive. The Bounded Rationality division of labour creates many activities for Bounded rationality is described as the cognitive which the only input of any significance is constraints on humans, which prevent the

Load more