WILLIAM LANGTON

Introduction and Context (Chapter 1)

2006-10-19T12:21:00.000Z

The Pyramid of Cheops at Gizeh in Egypt, the Taj Mahal in India, the Great Wall of China are amongst the greatest, most spectacular structures ever created, built in times when resources were inexpensive and abundant. Centuries later the world and its inhabitants have changed. Mega projects are still undertaken but the lack of resource, the cost of money and the profit motive in construction has resulted in projects being primarily commercially driven. When a new hospital, a telecommunication system, a railway or a power station is commissioned it will be expected to be commercially viable, however with advancements in society the commercial risk increases and intensifies. Will our current attitude and approach be adequate for a construction industry of the twenty first century?

This paper is a study of the management of the risk of dispute in construction and the influence of information technology. Why is this subject important and central to progression in the construction industry? One only needs to take a look at the characteristics of the construction process which are prototypical in nature, involves interface with existing infrastructure, involves site specificity, normally involves exposure to the element and the design is normally not complete when the contract is awarded, to name but a few, which requires that the scope of work be changed in its’ implementation, to realise the construction process is hugely dependant on the effective management of change. The combination of this environment involving change and the parties conflicting commercial interests creates a fertile ground for dispute. Pertinently Phillip Capper said in his paper titled “Why are there so many Arbitrations in Construction, commenting on the distinctive features of construction”.
“Whatever contractual documents are used there are a number of characteristics which are common to, and largely distinctive of, almost all construction projects. It is generally in these characteristics that the seeds of disputes lie, and which explain not only the higher occurrence of disputes in the industry, but also the traditional particular mechanisms for their resolution.”

If it is the nature and characteristics of construction where the seeds of dispute lie then is industry practise up to speed with techniques to manage this aspect adequately and is the industry adequately served with the necessary tools implemented by the latest law reforms to deal with the issue of disputes?
Recent Developments
The importance of a healthy construction industry was recognised by the government when they commissioned Sir Michael Latham to investigate the problems in the construction industry. The Latham report extolled the virtue of creating a conflict free climate for construction. The need for finding ways to deal with disputes and differences quickly and effectively in a way that has a minimum impact on the works has been recognised and manifested in a number of ways in recent years:

• Legislation in the form of the Housing Grants, Construction and Regeneration Act 1996 and the Late Payments of Commercial (Interest) Debts Act 1998 which have sought to create a fairer climate for doing business with the intention of reducing the number of disputes.
• The growth of partnering as a means to promote conflict free procurement of construction projects together with a commitment to fairer and simpler forms of contract.
• The Woolf Reforms is a major overhaul of the procedure of civil justice and seeks to simplify the administration of the court system and create a civil justice system which is quicker, fairer and more accessible.
• The reform of the arbitration system by the Arbitration Act 1996 which aims to create a more efficient climate within which to administer arbitration.
• The development of adjudication and ADR as means to resolve disputes without the need for full rigours of arbitration and litigation.
• The use of the Technology and Construction Court of the Pre Action Protocol for construction and engineering disputes. This requires the production of the intended claimant of a detailed letter of claim, setting out in detail the basis of the claim. The defendant is required to meet to attempt to narrow the issues of dispute. The purpose of this protocol is to encourage the parties to discuss their respective positions in detail prior to proceedings.

Two distinct themes have emerged from this new regime, firstly an attempt has been made to find ways to reduce the traditional adversarial approach and make way for collaborative ways of working in a partnering environment. Secondly the recognition that resolving differences and disputes that inevitably occur is a facet of commercial life in the construction industry, therefore machinery has been put in place to deal with disputes.

To what extent has this new regime achieved its aims and what more can or should be done in pursuance of a conflict free climate in the construction industry? For example to what extent has partnering achieved the goals that it set out to achieve and how has adjudication helped to deal with disputes quickly? Have any new problems emerged or have any deficiency points become evident from these reforms with the shift in dynamics in the construction industry?

The objectives and approach
This paper aims to analyse the implications of the new regime in the construction industry and identify the problem areas and deficiencies that have emerged as a consequence of the new regime or still in existence from the old regime. The paper then aims to make practical recommendations by using lessons learnt from the financial industry with consideration given to the special needs of the construction process, the theory of risk management and the legal principles used in the resolution of disputes. To achieve this, the paper has adopted the following process:

The process of risk management
An analysis of the theoretical process of risk management is made to be used as a baseline for a comparison with the current approach to risk management in the construction industry. This comparison is made to identify the weak link in the construction risk management process.

The construction process and the pathology of the arising disputes.
An analysis is made on the current risk management process in the construction industry and the manifestation of disputes and then how they are subsequently resolved. The types of dispute resolution processes are considered and what the law is aiming to achieve, with the aim of assessing where improvements can be made..

Risk management in the financial industry
The financial industry was chosen because of the recent advancements that have been made in operation risk management since the collapse of Barings bank in 1995 through the actions of a single rogue trader. The paper then explores to what extent the approach from the financial industry could be beneficial to the construction industry.

The process of claiming in the construction industry
This chapter looks at the unique challenges the construction industry faces and the need to understand these unique problems to manage them effectively. The unique characteristics of construction must be taken into account when consideration is given to adopting methods and techniques used in the financial industry.

The survey on managing the risk of dispute in construction
A survey was undertaken investigating the opinions of construction professions of the management of the risk of dispute in the construction and the influence of information technology.

Hypothesis for an integrated construction management system
Based on the above elements a hypothesis is developed using the approach from the financial industry adjusted to dovetail with the special needs of construction, which results in an integrated project management system using information technology to manage information effectively. An example is then provided illustrating the benefits that can be achieved in day to day management using factual data.

Conclusion
The future of risk management construction industry and the role of information management is considered.

The process of risk management (Chapter 2)

2006-10-19T12:19:00.000Z

All business activities involve risk. Depending on the particular business there are different stages in its operations where it could be more prone to risk. This chapter considers the theoretical process of managing risk in comparison with the way risk is managed in the construction industry. It is essential to have a baseline from which to measure the way risk is managed for the process of risk management is only as good as the weakest link. If the weak or missing link can be identified the actions can be taken to strengthen them or bridge the gaps where possible and feasible. The purpose of considering this is to identify the weak links in the construction process. In developing this theoretical model of the process of risk management various sources were used and construction professionals were interviewed.

The process of risk management
Risk management involves a deliberate set of actions designed to identify, quantify, respond/allocate and monitor/manage those things, events or actions that could lead to financial loss. In theory for risk to be managed adequately it is identified as a potential risk and quantified based on the probability of occurrence and / or the maximum impact. This provides an initial indication on the scale and importance of the risk. The business will then be able to respond to the risk by deploying a strategy which could be avoidance, transference, insurance, hedging and diversification etc, depending on the circumstances. The next stage is monitoring and managing the risks that have been defined as well as identifying new arising risks and then following the same process.

A more detailed analysis of these four steps is as follows:
Risk Identification
The identification stage of the risk management process involves capturing those risks that might impact the enterprise and its principal activities. Identification will depend on what is being dealt with, as the nature of the risk could vary, for example project risk would be different in nature, impact and timing to strategic risks. The process by which they might be identified might also differ. For example project risks may be able to be identified from a number of sources, including the plan, the product breakdown structure, experience and stakeholder analysis. Strategic risks can be identified through scenario analysis, market analysis and an assessment of the organizations primary business drivers. Although the context may differ, there are a number of common techniques that can be used to identify risk, including structured thinking, involvement of experts, historical analysis of failures, historical analysis of successes, critical success factors analysis and testing and analyzing assumptions.

Risk Quantification
Risks are typically quantified along two dimensions, impact and probability. Impact is usually measured in terms of the financial consequences which could be expressed for example as cost, time, market share, loss of sales and impact of share value. Whatever measure is adopted it should indicate the type of loss expected if the risk matures. When it comes to projects, the impact could be measured in terms of the cost for completion, which could involve time. The loss in this case would be wasted capital as well as the lost availability of the final product.

Probability is normally measured in terms of the likelihood of the risk occurring. In most instances a scale that is non-metric is chosen, for example high, medium and low. The purpose of the scoring mechanism is to make informed judgment, not to give an absolute indication of the probability or the financial impact. Once the impact and probability ratings have been agreed for a particular risk the two are multiplied together to give an indication of how critical the risk might be and hence whether it ought to be managed more actively.

Risk response and allocation
Response will be contingent upon the specific nature of the risk. However there are a number of basic strategies that can be adopted when developing the response, especially if the risk is considered too great. A party can avoid the risk by choosing to take an alternative course of action; a party can negotiate a transfer of the risk to a party more suited to manage the risk; a party can ensure against the risk maturing; a party can hedge by offsetting a risk; a party can diversify effectively spreading the risk or the party can choose to monitor and manage the risk.

Risk monitoring and management
This requires the organization and infrastructure to manage those risks that matter by following through on the agreed actions associated with the chosen response and monitoring the risks in relation to the wider organization and external environments. An aspect of the management stage is the recognition that failure does occur and therefore to have contingency plans. Such contingency plans lie at the heart of business continuity planning and crises management.

Risk management in construction
Normally on construction projects identification, quantification and response take place to varying degrees at the pre-contract stage. It is important at this stage to consider the dynamics between the parties created from the competitive tender process that is widely adopted in the construction industry. There is potential for a power struggle between the parties with each party aiming to bear as little risk as possible and achieve the most favorable risk profile which in turn has the potential for risk sharing to be unbalanced and unworkable. This issue was acknowledged in the Latham Report where the concept of partnering was promoted, whereby parties work together to achieve common objectives. It was also said that parties should establish long term relationships, which would effectively reduce the effects of competitive tendering.

It is difficult if not impossible to predict the vagaries that arise in the construction process as well as the new risks that may arise from time to time. During the post-contract stage the parties will monitor and manage risk, however there are difficulties with the construction process not being standard or repetitive and therefore the processes will change from project to project, thus making information management a complicated task. For risk to be managed adequately managers need adequate information.

Pre-Contract Stage

Post–Contract Stage

Figure 2.1 – Risk management processes in the pre-contract and post-contract stage in construction.

Conclusion
For risk to be managed effectively all steps of the risk management process must receive adequate attention. The current risk management practice in the construction industry seems to be more focused on the first three stages of identification, quantification and allocation which generally occur at the pre-contract stage. There seems to be a weak link in the risk monitoring and management step. This could be because the there is insufficient risk data due to the haphazard manor the way information is managed in construction projects.

The construction risk and change management process and the pathology of the arising disputes (Chapter 3)

2006-10-19T12:18:00.000Z

Introduction
Construction is a process whereby a contractor typically undertakes to carry out a specified scope of work for an amount of money that is fixed or for a variable amount of money determined using fixed rates. However when one considers how the scope of work is typically required to be changed in its implementation in construction, one can begin to understand the common problems the construction industry faces in managing the resultant risk and change. A major part of the construction process involves the management of risk and dealing with change, with the owner on the one hand demanding value for money and the contractor on the other hand aiming to achieve maximum profit.

Along the time line of the project there is typically a big focus on risk management at the pre-contract stage when the procurement method is defined and the contract is negotiated. A risk register is normally drawn up at this stage itemizing the probable risks, but how are these risks monitored and managed in the post-contract stage?

The construction industry is historically known for its adversarial approach to life however the industry has come up with new methods of procurement to deal with the problem. Partnering was designed to create a collaborative working environment between all the parties. However to what extent has partnering been successful in reducing the problems that arise in the construction process?

An important point to consider, as pointed out in Phillip Cappers article , is no matter what method of procurement or contract is used there are a number of characteristics which are common to, and largely distinctive of, almost all construction projects. It is generally in these characteristics that the seeds of eventual disputes lie. When change occurs parties will be faced with a process of agreeing on the liability and quantum. During this process it is inevitable that differences will develop from time to time as parties will naturally have their own self interests to pursue which may almost certainly be conflicting.

Commenting on the clues to the causes of disputed matters, Phillip Capper identified the problem that the construction industry faces with the diversity and sheer volume of evidentiary material.
Masses of record material are produced even on relatively small construction projects, many of them crucial as they are informal: such as eg the penciled scribblings of a gang member on daywork sheets, or mud stained card recording a piling set. Project records may be as diverse as site investigation reports, feasibility studies, specifications, drawings, tender submissions, estimating and pricing details, diaries, minutes of meetings, formal instruction, test data, payment applications and certificates, weather reports, job sheets, inspection reports, programming data and reports and so on. To all of that is added great chains of correspondence between the participants, managing reports in each of the entities and the usual periphery of any business activity: from management accounting to press publicity. It is haphazardly in these various forms of contemporary records that are found the clues as to the causes of disputed matters.

If the causes of disputes can be identified by retrospectively analysing these contemporary records then what steps need to be taken to arrange and manage these records to be able to identify problems in real time which could enable managers to make systematic decisions based on facts to take corrective actions and resolve differences that emerge?

Risk management in construction
This section considers the current practice of risk management distinguishing between the pre-contract stage and post-contract stage. At each stage there are different dynamics at play. The pre-contract stage very much involves identifying risks and negotiating their allocation while the post-contract stage is where risks need to be managed. What is the current approach and process to risk and change management in the construction industry and is it adequate? There has been a tremendous amount of interest in this area and a substantial amount of theoretical material published however this is not always helpful. As Max Abrahamson put it, all discussions on theory could be suspended until practice has caught up .

Pre Contract Stage
At this stage in the construction process there is a focus on risk identification and allocation. Once the risks have been defined they are allocated to a party. Depending on the circumstances the employer will choose a method of procurement that he anticipates will best suite the nature of the particular project. This process will largely depend on the circumstances of the owner. The owner will normally employ consultants to investigate the risks and then ultimately decide what method of procurement best suites the owner. For example an owner that is procuring a new telecommunication system which involves new technology may decide that operation and maintenance of such a system is best controlled with an expert party who has the necessary skills. This may be one of the reasons for an owner deciding that a Build Operate/Maintain and Transfer (BOT) procurement method is best suited. In another instance the owner might be highly skilled and sufficiently resourced in this area and therefore may decide on a traditional construct or possibly design and construct method and take responsibility for the operations and maintenance of the asset.

Under traditional procurement the contractor is seldom involved at the pre-contract stage and therefore does not have the opportunity to add to the upfront definition of risks, choice of procurement and allocation of risks. These are therefore to a large degree imposed on the contractor. This has been one of the criticisms of the traditional approach. However under partnering arrangement the parties are encouraged to engage early in the project cycle to encourage early participation of the contractor.

Post Contract Stage
When the contract is awarded and the work gets underway, the emphasis normally shifts to monitoring and managing risk. The possible risks and change events on a construction project are vast and there is no universal standard for categorizing them and the way they are dealt with. This is probably because these events vary from project to project. In most cases risk and change are managed intuitively as opposed to systematically. There are reasons for this, one reason being the construction process is inherently prototypical as opposed to repetitive and therefore the processes do not lend themselves to a systematic method or approach. This could result in problems because the cause of a dispute may only become apparent well after the event that caused the dispute in the first place. Therefore it is difficult, if not impossible, to manage adequately. This is believed to be largely due to the archaic methods of information management still in existence in the construction industry.

To illustrate this point, a simplified example is provided of a typical way the risk of providing sufficient resource to complete a construction project on time is managed. If this is not managed effectively it could cause delay to the programme resulting in a party either incurring liquidated damages or an entitlement to extension of time.

Example - Managing the risk of providing adequate resource levels
There will normally always be a minimum, optimum and maximum level of labour resource required to complete a defined scope of work within a fixed period of time. There also could be limitations to the availability of the necessary skilled labour. If the contractor provides a level that is below the minimum level he will not complete on time and consequently he will have to pay liquidated damages for being late. If the contractor provides a level of resource above the maximum level then he will start working inefficiently and therefore not realize maximum profit. Therefore he will aim for an optimum level where he completes on time and realizes the maximum profit. How is this risk managed? This risk is normally managed at site management level based on the opinion of an experienced manager. If the work is not completed on time how will it be decided if there was adequate labour resource to complete the scope of work within the defined timescale? Essentially if it can not be agreed between the parties there will ultimately be a retrospective delay analysis prepared based on the contemporaneous records and a comparison will be made with the contract programme.

The above is a simplified version of a scenario that in practice is normally much more complicated. The purpose of the above example is to point out the disparity between the way risk and change management decisions are made and the way liability is determined.

The above example of risk and change is simplistic but even these simple issues on a big scale can become extremely difficult to manage without adequate systems being in place that collects and analyse the contemporaneous records in real time.

Strategies that construction companies adopt for managing risk
It is evident that some large construction companies actively pursue an overall high risk and high return strategy on the basis that they accept that there will be some loss and some profit. Smaller companies tend to spread their risk, in order to reduce its overall exposure, at a lower rate of return.

To what extent does this practice result in contractors being generally complacent in the area of real time risk management and detract from the actual issues being dealt with effectively?

The decision making process in the construction industry
The decision making process in construction is to a large degree based on the intuition of decision makers as opposed to a systematic approach. Intuitive decision making involves making decisions with no immediate factual rationale and is to a large degree based on the experience of the decision maker. Where culture and experience exist in a stable environment intuitive management can perform reasonably well according to some studies . However the complexity of contractual relationships and increasing size of the mega projects that are undertaken and a host of other reasons means that the intuitive method of decision making is only reliable to a degree and very dependant on key personnel.

Gary France in his article on controlling time in construction emphasises the importance of analysis and management in the controlling of risk in construction projects. However he said that the use of computer systems like Monte Carlo which carry out simulation tests based on random probabilities are totally meaningless. He goes on to say that mathematical or quantitative risk management is the most reliable.

Would it be possible for a construction project to convert to a systematic approach to decision making? Considering the prototypical nature of construction the amount of investment required to develop a system to fulfill this function for a one-off project may be perceived to outweigh the benefits.

Pathology of the arising disputes in construction
Most of the standard form contracts are designed to identify problems at an early stage. This is normally through a notification process advising a party of a problem or a change that could result in loss being incurred by a party which the other party could be liable for. This is no coincidence, as the earlier issues are identified the more chance parties have in sorting them out by taking corrective actions and or reaching agreement on the matter. If the parties fail to resolve any differences that could have emerged from the event, it is likely that the difference will develop into a dispute. For a claimant, wanting to pursue a claim through a coercive process, it is necessary for a dispute to have arisen, in the legal sense, before it can be referred to arbitration or adjudication .

For a manager weighing up the chances of success of a claim he will want to know intimately how the dispute will be dealt with and how a decision will be reached. At this stage the manager will have to make a decision on the likelihood of success or failure and ultimately whether to pursue the claim or not, considering costs and other relevant factors. We therefore consider the process of how disputes manifest themselves and then how they are resolved.

The manifestation of disputes
A common tactic in construction disputes is to argue that no dispute exists; therefore it is important to distinguish between a dispute and a difference. The fundamental distinction between a difference and a dispute is a dispute develops in a situation where a claim has been rejected, in part or in whole, or has simply been ignored by the other party. However where a party has not rejected the claim and has requested further information it is likely to be a mere difference. However where no dispute has in fact occurred will depend on the facts of the case. In Fastrack Contractors v Morrison Construction (2000) Judge Thornton QC stated
A dispute can only arise once the subject matter of the claim, issue or other matter has been brought to the attention of the opposing party and that party has had an opportunity of considering and admitting, modifying or rejecting the claim.

The process of requesting further information can be lengthy. Even a relatively minor difference between parties can take months or years with the process recycling a many times until, adequate information is provided, a deal is made that both parties can live with or it gets to a point where it is plainly obvious that a dispute is in existence.

How disputes are resolved
The importance of contemporaneous records in the dispute process was considered in the case of Attorney General for the Falklands Islands v. Gordon Forbes Construction (Falklands) Limited (2003). A contract was let using the FIDIC 4th Edition conditions which like most standards forms provide a procedure for submitting claims. The first principle being to provide notice of intention to claim within 28 days after the event occurring and the second obligating the contractor to keep contemporaneous records necessary to support the claim. The contract went a step further requiring a detailed account of the claim to be issued within 28 days from the first notice. In the event of the contractor failing to provide a detailed account of the claim the contract provided for a fall back position stating that the contractor’s entitlement will not exceed that amount the engineer or arbitrator could consider verified by contemporaneous records. The events that unfolded on site were typical of the construction industry with the contractor failing to provide a detailed account of a claim within the required timescale. A dispute then developed because the contractor did not have sufficient records to satisfy the requirements of the fall back position. The judge considered that the requirements of the contract were clear and ordered a way to deal with the claim. Claims have to be notified at the time they arise, contemporaneous records have to be kept and regular accounts rendered. The judge explained that the whole contractual system is aimed at the early resolution of any queries at the time the claim arises. He ordered that where there are no contemporaneous records the claim would fail.

This sends out a strong message on the importance of adequate contemporaneous records in resolving disputes. A party that does not keep adequate records will be at a major disadvantage and will substantially prejudice his claim and any chances of recovering his losses.

Non-coercive dispute resolution process
It has been established by survey that negotiation is by far the most favored method of resolving disputes in the construction industry. This is largely because the process does not involve high costs and results in both parties achieving a solution that they can live with. What are the requirements therefore of achieving success in the negotiation process? Where a party has not been empowered to make decisions it will almost definitely be a barrier to successful negotiations. For example in projects that involve public funding, negotiation may simply not be possible if there is not a public servant willing or empowered to make the relevant decision . On the other hand there may be other circumstances where if a manager can be persuaded that the claim is justified and there is sufficient substantiation to prove that going to a coercive method of dispute resolution would result in failure. In these circumstances a manager may feel more comfortable to make the relevant decision.

Negotiation is a non-coercive process of communication which ultimately leads to a joint decision. Goldberg described negotiation as “communication for the purpose of persuasion; the pre-eminent of dispute resolution”. Negotiation in its broad sense is more that just the process of dispute resolution it may be considered as the process by which individuals communicate in order to arrange their business affairs and private lives by establishing agreement and reconciling areas of disagreement.

The process of negotiation on a construction project clearly is dependable on information availability and / or the ability the parties have to assimilate large amounts of information which involves data collection and analysis as well as the understanding of principles that establish liability and measurement of the quantum.

To what extent is the reason for differences evolving into disputes on construction projects down to the large amounts of documents that need rationalising, but are not? If the information was readily available and if managers had the skills or advice to define the principles to establish liability and measure the quantum would change, problems and differences develop into disputes or would they be dealt with more amicably?

Coercive dispute resolution
Adjudication, arbitration and litigation are coercive processes but adjudication is not final and can be challenged if the losing party is not satisfied. Arbitration is final and binding and litigation is final and binding with scope for appeal.

In 1998 the Housing Grants Construction and Regeneration Act 1996 (the Construction Act) came into force. Prior to the Construction Act neither litigation nor arbitration provided the speedy resolution of disputes which are often required in the construction industry. Typically prior to the Construction Act standard contracts could provide that litigation or arbitration could not be commenced until practical completion therefore disputes could be left unresolved for the duration of the contract. The Construction Act now makes adjudication available for parties to resolve any dispute arising under the contract at any time with a decision being given within 28 days of appointment. While this legislation has been a positive move for the construction industry it has created difficulties for parties when unmanageable quantities of relevant information have to be dealt with .

Essentially the rationale behind the concept of statutory adjudication in the construction industry is the provision of quick, cheap summary procedure that applies to everyone in the construction industry . Adjudication jurisprudentially is similar to certification by an architect or engineer and is a second tier of evaluation that is made if the parties dispute a contract administrator’s determination. An important point is it aims to resolve disputes speedily because cash flow was described as the life blood of the industry by Sir Michael Latham.

The same general trends and pursuit for speeding up proceedings can be seen in the sphere of litigation. In June 1996 Lord Woolf published a review of the civil justice system saying that it was too slow, too costly and too complex. The objectives of the pre-action protocol encourages the exchange of early and full information about prospective legal claims to enable parties to avoid litigation by agreeing a statement of the claim before commencing of proceedings. Even when proceedings for litigation start they are normally settled out of court as the result can normally be predicted once put into perspective.

In arbitration the trend of speed is further continued. In the Arbitration Act 1996 the parties have the choice to decide on the degree of formality they desire, how much time will be allocated to various aspects of the process and how documentation, discovery and the taking of evidence will be handled. Essentially one of the objectives of the 1996 Arbitration Act was to ensure that the process is fair, cost effective and rapid; to promote party autonomy; to ensure that the courts supportive powers are available when required etc.

Conclusion
It is clear that in practice there is a long drawn out period from when a claim is initially identified to when the parties are in a position to resolve the matter. This is indicative that the parties do not know much about the dispute when a claim is first made. Probably the only thing that is known at this stage is that the target profit margins are probably not being met. This is then followed by a long and drawn out process of retrospective analysis to define what went wrong, who is to blame and how much is due to whom

The management of risk and change in the construction industry is currently based more on intuition as apposed to systematically . This exposes the parties to the risk of the wrong decisions being made of which may not be reconcilable with a retrospective analysis carried out by the lawyers and claim experts after the event. This leaves the construction industry in the dilemma where the real answers are only arrived at much too late in the process to deal with the problem.

In terms of the dispute resolution process it seems that an adequate legal framework is probably in place to speed up the process through adjudication, arbitration and litigation. However it seems construction industry practice is lagging behind and not capable of being able to taking full advantage of the new reforms in the law because of the archaic methods still being used to manage information.

Risk management in the financial industry (Chapter 4)

2006-10-19T12:17:00.001Z

Since the crash of Barings Bank in 1995 through the actions of a single rouge trader the topic of operational risk has been bolstered into the spotlight as the severity of this risk was exposed. This chapter analyses the failings of Baring Bank that led to its’ collapse and the steps that the financial industry has since taken to meet the challenges of managing this risk. It is then considered whether these lessons learnt can be applied to the construction process.

The analysis is made from three perspectives. Following the collapse of Barings Bank the Bank of England investigated the causes and produced five lessons to be learnt from the event. The British Banker Association and Coopers & Lybrand conducted a survey on operational risk a few years after the Barings Bank collapse which provides an indication of the feelings of the industry at the time and their views on the problems the industry faced in respect of operational risk. Consideration is given to both these sources and their views on the Barings Bank collapse and managing operational risk. Finally, the Canadian Bank was one of the first banks to respond to reports and the threat of operational risk. Therefore consideration is given to the resultant actions taken by the Canadian Bank to meet these challenges.

Bank of England Report into the collapse of Barings Bank
The report indicated that the collapse of Barings Bank would not have occurred if there had been an effective system of management, financial and operating control within Barings. The report detailed a number of failings as follows:
“The money required to fund the losses came primarily from London (the banks headquarters). It was advanced to Singapore with no independent check on the validity of the requests or any attempt to reconcile them to any known trading position. If management in London had sought to examine the information from Singapore to support the requests for funds, it should have discovered that the information was meaningless.”
"Barings management in London seems generally to have believed that the money being sent to Singapore was being lent to clients to facilitate their trading. However, the credit aspects of these advances were never formally reviewed or considered by the credit committee. Barings' management did not question why it was apparently lending over £300 million to clients to trade when it had collateral of only some £31 million from clients for those trades”.
"The management of Barings did not question the extraordinarily high levels of apparent profitability of supposed arbitrage dealings in Singapore, which were regarded as being without risk. In the Board of Banking Supervision's view these profits should have been viewed as abnormal and questionable, and the extraordinary profitability reported in 1994 should have attracted the close and thorough attention of the management, long before the collapse.”
"Despite Leeson's (the rogue trader who was responsible for the collapse of Barings Bank) efforts at concealment, some information on the account he used to hide his losses was available to London, but it was never analysed. No one within Barings accepted responsibility for Leeson's activities for the whole of 1994. Leeson's deception was made easier as he was not just a trader but also in charge of the so-called 'back office' which processed the paperwork associated with trading. In 1994 Barings' internal auditors recommended that as a trader he should not have this responsibility for the back office. Barings failed to implement this recommendation.”
The report indicates that information was available that could have prevented the incident from happening and the failings were due to the systems of the bank that did not identify the problem. The retrospective analysis made by the Bank of England highlighted the failings. It is questionable whether real time analysis would have saved Barings from collapse. The Bank of England suggests that it would have and should have saved Barings.
The report produced five lessons that could be learnt through the bankruptcy of Barings as follows:
• Firstly, management teams have the duty to understand fully the business they manage.
• Secondly, responsibility for each business activity has to be clearly established and communicated.
• Thirdly, clear segregation of duties is fundamental to any effective control system.
• Fourthly, relevant internal controls, including an independent risk management function must be established for all business activities.
• Fifthly, top management and the audit committee have to ensure that significant weaknesses are identified to them by internal audit and are resolved quickly.

Furthermore it was stated that at least one and usually several of these points was the reason why firms lost large sums of money within the derivatives market.

British Banker Association and Coopers & Lybrand Survey on operational risk
Subsequent to the Barings Bank collapse the British Bankers Association (BBA) and Coopers & Lybrand conducted a survey among the BBA members in 1997. The results reflect the views of directors and senior bank management of the banking industry in the United Kingdom and provides their view on operation risk.

More than 67 percent of banks thought that operational risk was one of the most important areas of risk that required management and 24 percent thought that they had experienced a significant loss through operational risk in the last three years before the survey was conducted.

The report indicated that many banks had some way to go to formalize their approach in terms of policies and generally accepted methods and it is difficult for banks to manage their operational risk without some kind of formal infrastructure in place. The report indicated that it was easy for a bank to inadvertently duplicate efforts in operational risk management or conversely for such risks to fall through gaps because no one has been made responsible for them.

According to the report, modeling and quantifying operational risk generated the most interest of all areas of operational risk. The report emphasized that this may well be because banks do not have the relevant data required to manage risk effectively. The report revealed that data collection was an area that banks are gearing up to focus on in the future.

For banks that do not have sufficiently developed operational infrastructures they sometimes use internal audit recommendations as the sole method to manage operational risk. Finally most banks were not complacent and expected to make changes to their approach.

Case Study of Canadian Imperial Bank
The Canadian Imperial Bank of Commerce was one of the first institutions to implement a plan to counter the newly exposed threat of operational risk. The bank recognized that operational risk is wide and arises from the failure in the course of operating the business.

It was recognized that a “beginning to end” approach had to be taken into account for all the stages where operational risk occurs. As an example the operations of a derivatives desk is used to demonstrate the approach. Risk begins to accumulate even before the design of the potential transaction gets underway. It is present during negotiations with the client and continues after negotiation as the transaction is serviced. Several things have to be in place before the transaction can be negotiated and each exposes the firm to operational risk. First, sales may be highly dependant on a valued relationship between a particular sales person and the client. Second, sales are usually dependant on the highly specialized skills of the product manager who comes up with both a structure and a price that the client finds more attractive than competing offers. This means that the institution is exposed to “people risks”. For example there may be uncertainty as to whether these key people will continue to be available. In addition do they have the capacity with any increase with the sophistication of clients, or are they dealing with too many clients to be able to handle these demands? During the processing of the transaction, the firm is exposed to several further risks. First, the sales person may knowingly not disclose the full range of the risks of the transaction to the client. The risk might be associated with periods when staff are under intense pressure to meet bonus targets for their desks. Similarly the sales person might persuade the client to engage in a transaction that is totally inappropriate for the client exposing the firm to potential lawsuits and regulatory sanctions. Another aspect and potential risk is a sales person may rely on sophisticated financial models to price the transaction. This creates what is commonly called model risk. Model risk can arise because the wrong parameters are input to the model or because the model is used inappropriately. Once the transaction is negotiated and a ticket is written, errors can occur as the transaction is recorded in the various systems or reports. An error here may result in a delayed settlement of the transaction which in turn can give rise to penalties. Furthermore an error in market risk and credit risk reports might lead to the exposures generated by the deal being understated. In turn this may lead to the execution of additional transactions that would otherwise not have been executed.

In essence the list can go on, however each type of risk can be captured either as a people or process risk, each can be analyzed in terms of capacity, capability or availability and are capable of being identified by analyzing data created through the business process.

The bank recognized that to be able to manage these risks the relevant data is required and systems need to be in place to prevent the risk occurring. For this to be effectively achieved a data and technological infrastructure is required to be able to implement an integrated risk management system that considers all aspects of the operation.

The bank identified the need for a holistic risk management system that was supported by information technology architecture that is employed in all of the company’s processing. The logic behind the system must be generated by the business principles and functions. The design of information technology architecture would be a collection of sub-systems that supports each functional department. Banks have many business units which are engaged in different products. The design of the information infrastructure is required to optimize the exchange of information between each unit within the firm. All should be operating within this unified information technology framework. In this way data is collected and stored in a central data warehouse and organized into a common format. The data would also be capable of being used to manage functions and analyze risk etc.

The system would use tiered risk sub-systems to integrate the front, middle and back office enabling segregation of responsibilities managed through interactive data exchange. Managers are provided with live data and risk software applications and reports that can be used to make decisions.

However it was recognized that the integration of legacy systems with the new system could be challenging. It was further recognized that a significant investment would have to be made in their computer technology to implement the system.

Conclusion
There are significant lessons to be learnt from the financial industry reform resulting from the Barings Bank collapse. Although the processes involved in construction are considerably different to those in the banking there are principles in the management of risk that are transferable.

The processes in both industries produce masses of documentation and it is in this documentation where the information and data is needed to manage operational risk. In the financial industry complicated models are used to price transactions and in the construction industry complicated programme and cost models are used as a base to price the execution of the scope of work. Essentially to manage the operational risk it is the data that is produced in the execution of the business operation that requires to be reconciled with these models.

The report on the collapse of Barings Bank revealed that there was information available that would have revealed the problems however the information was not analysed. The question regarding the construction industry is to what extent will real time data and the analysis thereof help to improve on efficiencies and resolve differences before they develop into a dispute? On this matter an experienced claim consultant was of the view that if quality information existed, parties could more readily demonstrate to the other why there is a legitimate entitlement. He held the view that the best way of resolving differences was by sharing information with a proactive attitude and then dealing with the matters before they escalated out of control.

The process of claiming in construction (Chapter 5)

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The reason why construction projects are often associated with being late and overrunning on time and cost is not necessarily a result of incompetence or failure of managers, the result could simply be a consequence of the nature of construction. In most construction projects the design would not have been completed before the contract is awarded requiring the original scope of work to be changed in its’ implementation. The result being change occurs and a claim submitted to recover the additional costs.

The objective of this chapter therefore is to define this process of claiming and the problems that are encountered that are likely to cause disputes to develop.

Claiming in the construction industry
Claiming is a fundamental part of the construction process and it was acknowledged by Sir Michael Latham that disputes may arise despite everyone’s best efforts to avoid them .

There are three main underlying causes of disputes in construction: project uncertainty, process problems and people issues . If these causes are not addressed early they result in disagreements that may escalate to litigation or arbitration. This escalating process will involve more people, additional time and higher costs. It is therefore essential for problems to be identified as quickly as possible and then dealt with on a day to day basis.

In the book Dispute Resolution in the Construction Industry authored by Nicholas Gould, Phillip Capper, Giles Dixon and Michael Cohen, the importance of identifying the root causes of problems quickly and dealing with them straight away is emphasised:
“That construction disputes are caused by project uncertainties, problems in the process, or people issues. It is these three categories that drive the development of disputes. More specifically and by way of example a common root cause such as uncertain ground conditions which lead to inappropriate expectations and perhaps personality clashes may then generate claims based on the contractual provisions. Uncertainties which are not dealt with by the project participants on a day to day basis can evolve into protracted disagreements, claims and disputes. This process of disputing is fuelled by entrenched positions, lack of communication and clashes of personality”

It was said further:
“That dividing the causes of dispute into project uncertainties, problems with process and people issues is useful to identify causes will under normal circumstances fit under one of these headings. The difficulty lies in identifying the root cause”

The key steps therefore that are essential to construction in dealing with these problems must be as follows:
• Firsty be to identify the root causes as they occur.
• Secondly the root causes need to be dealt with by the project participants on a day to day basis as and when they occur.
• Thirdly there must be an environment where people work together with common goals designed to be as close as possible.

Because of the nature of construction being prototypical and not repetitive all these steps are problematic as there can be no standard process that can be systematically applied to all projects. Each project will have its own unique requirements and unique problems etc. Therefore problems are generally not identified quickly as there is no systematic process that is capable of identifying problems as and when they arise.

In most standard forms there is a requirement for the contractor to notify the owner when a problem occurs which could result in a claim. This is a concept that is central to the Engineering and Construction Contract. However the decisions to issue these notices are typically based on intuition and not based on fact when they are first issued . Because of the haphazard fashion contemporary records are managed in construction, the parties cannot deal with them when they arise or even at a time soon after the event has occurred . It is likely that due to these problems with step one and step two, it is very difficult to create an environment where the project participants can work together.

Conclusion
Because of the nature of construction, claiming is a fundamental process that is impossible to get away from. The question is how can the claiming process be managed effectively without it resulting in a high percentage of disputes. There seems to be a problem with the speed problems are being identified and the excessive time taken to produce claims. Therefore does the construction industry need adequate systems that identify problems in real time? When these problems are identified the relevant contemporary records need to be accessible in a format where they can be understood.

If these steps can be achieved would parties more readily be able to demonstrate there is a legitimate entitlement creating a window of opportunity to resolve problems quickly? Furthermore would this enhance the collaborative environment of working together that the construction industry is trying so hard to achieve?

The survey on managing the risk of dispute in construction (Chapter 6)

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A survey was carried out mainly with the support of friends and colleagues within the construction industry and a small amount randomly solicited. Of the questionnaires sent out to people that I directly knew, 92% responded. Of the small amount of surveys sent to people that I had no previous contact with 11% responded. A total of 38 questionnaires were received. There was generally an equal balance of responses received from engineers, project managers, construction managers and quantity surveyors. The were also a few lawyers that responded, one who is a senior in house lawyer from a major American construction company with an annual turnover of 13 billion dollars. There was a response from a chairman and a managing director of well established construction companies with annual turnovers over 20 million and 300 million pounds respectively.

Validity of responses
An analysis of the respondents experience within the industry and the type of construction projects they were involved in was carried out. 40% of the respondents had over 20 years experience in the industry, 40% had between 10 and 20 years experience and 20% had less than 10 years experience. 33 % of the respondents had gained their experience from general construction type of work, 62% from major infrastructure type work and 5% from house building type work.

90% of the respondents had been involved in some form of dispute resolution process ranging from litigation, arbitration, adjudication, expert determination, mediation and negotiation.

Objectives
The main objective of the survey was to solicit the opinions of construction industry professionals on their perceptions of the management of the risk of dispute in the construction and the influence of information technology.

Analysis of the responses
Decision making in construction projects
The respondents were asked in their opinion how decisions were made on construction projects. Three options were provided as follows
• Intuitive decision making based on perception.
• Systematic decision making based on fact.
• The respondents were given the opportunity to choose another approach and provide details.

The analysed results are represented in Fig.6.1. Most of the respondents (40%) stated that decisions in construction are normally based on a combination of both intuitive and systematic methods. Some respondents cited reasons for not being able to make decisions systematically due to time constraints and lack of information as well as lack of understanding of the decision maker. 25% thought that decision making in the construction industry was intuitive and 35% thought it was systematic.

Fig 6.1 – Opinion on the way decisions are made on construction projects.

Although 35% of the respondents initially thought that decisions were generally systematic, when further questions where asked and explained the respondents agreed that decision making was primarily intuitive.
Cost and time overrun on construction projects
The main factors for disputes in the construction industry are because projects do not meet their time and cost budgets. There are literally hundreds of reasons for this happening. However to quantify these reasons the respondents were given the choice of three categories as follows, represented in Fig. 6.2:
• The first category represented two groups that should be capable of avoidance by the parties which included wrong decisions and inadequate systems and policies. The total of these two groups of inadequate systems (36%) and wrong decisions (20%) was 56%.
• The second category included one group, the nature of construction. This category represented reasons which are not capable of being totally prevented (out of the control of parties). The total of this category was 24%. This was the choice of 75% of the respondents with more that 20 years of experience in the construction industry.
• The third category provided the respondents with an opportunity to state any other reasons that in their opinion were the main causes of cost and time overrun, which were not mentioned. The total for this category was 20%.

Fig 6.2 – Why construction projects overrun on time and cost

The effectiveness of risk management in the construction industry
This section was aimed at understanding whether the construction industry in general was doing enough to manage risk. The respondents were asked their opinions whether general operation risk was effectively and actively managed on construction projects and whether they thought more focus was needed on risk management to reduce cost and time overruns on construction projects. As represented in Fig. 6.3, 80% of the respondents thought that more focus was required to actively manage risk to reduce cost and time overrun in the construction industry, 15% thought that enough was being done to manage risk and 5% either did not know enough about the subject or gave an equally weighted answer.

Fig. 6.3 – Percentage of respondents that were of the opinion that risk was well managed in the construction industry

The use of information technology in managing information and process in the construction industry
The financial industry has embraced the use of information technology to manage information, processes and risk with a reasonable level of success. The purpose of this question was to get an understanding in general of the view of construction professionals in this respect. As indicated in Fig. 6.4 only 35% were of the opinion that the construction industry was up to speed with information technology development, while 45% thought that the construction industry has not kept up with the pace of information technology development. There was a group of 20% of the respondents who were unsure of the question. One respondent said that the question was not comparing apples with apples and another thought it was impossible for the construction industry to adopt information technology in the same way as the financial industry did because construction projects are always different while in the financial industry there was a lot of repetition.

Fig 6.4 – Percentage of respondents who were of the opinion that the construction industry was keeping up with the pace of information technology development

Barriers to resolving differences in the construction industry
In practise and in theory there could be a host of barriers to resolving differences that arise in the construction industry, however there are some general recurring themes in this respect. To probe the respondents opinions to what they thought the main barriers were the respondents were given a choice of the following options:
• Personal issues
• Lack of contractual mechanism
• Power imbalance between parties
• Lack of quality information
• Other of which details were requested
As detailed in Fig.6.5 the respondents thought that the main barriers were lack of quality information (28%), personal issues (24%), other (24%), lack of contractual mechanism (18%) and power imbalance between parties (6%).

Fig 6.5 – The main barriers to resolving differences that arise between parties on construction projects

The best ways of preventing disputes in the construction industry
An open question was asked with no multiple choice answers on the respondent’s opinion on the best ways of avoiding disputes in construction projects. There were a few general themes as follows:
• Communication and the ability to make quick decisions between parties who were adequately empowered to do so were seen as a key theme. This was summed up quite neatly by one respondent “Sharing information, a proactive attitude, dealing with matters before they escalate out of control and then sensible negotiation”.
• There was a general feeling that adversarial relationships had to be worked on and it was necessary for all parties to work together with common objectives.
• One theme that was picked up on was the need for more robust contracts and specifications from the outset.

The use of real time analysis as a management tool in the construction industry
An open question was asked with no multiple choice answers that probed to what extent the respondents thought that real time analysis of contemporaneous data would help parties in managing the construction process effectively and resolve differences when they arise and prevent disputes. Most of the respondents were of the opinion that it would definitely be beneficial however there were general scepticisms; that all parties would need to buy into the process, that the analysis would need to be measured against a programme that was agreed at the outset and that because of the nature of construction not being repetitive it would be a major task of which costs could outweigh the benefits and even then there was no guarantee that it would be of value. One respondent with over twenty years in the construction industry working as a claims consultant said that real time analysis would be a boon for the construction industry provided contracts supported it.

Hypothesis for an integrated IT construction project management system (Chapter 7)

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The objective of this hypothesis is to propose how an information technology system can be implemented to manage information on a construction project that will speed up the process of identifying problems, in real time, through a systematic process as well as provide access to the contemporary records for evidentiary purposes. An example is then provided on how the data can actually be used to identify problems and resolve them before they develop into disputes. It is recognized that there will always be potential for disputes therefore the system must be capable of taking the dispute forward to a coercive dispute resolution process.

Towards an integrated management system
The system recognizes that the weakest link in the risk management process in construction is in the post-contract stage where risks are monitored and managed. To over come this, the approach by the Canadian Imperial Bank is used by creating an infrastructure where all processes are carried out electronically. To accommodate the prototypical nature of the construction process the system is flexible to accommodate the ever changing and evolving nature of the construction process. This is achieved by using a standard electronic form as the user interface which sends the data to a central data warehouse were the data is stored. By creating this infrastructure real time data is available to managers enabling them to identify problem areas on a day to day basis and therefore risk and change are capable of being managed as they arise. If agreement is not reached on a matter it can be taken forward to a dispute resolution process, using the same data. The risk of dispute is managed by having all the information at hand to make informed decisions.

The system adopts a holistic approach incorporating all sub-systems of the construction process as represented in Figure 7.1.

Figure 7.1 – Illustration of the system architecture using a selection of data sources commonly seen in construction

There are three main aspects of the system as follows:
Data Collection
Instead of stand alone applications being used with stand alone databases all data will be transmitted and stored in a central data warehouse. Where paper systems are being used they will be replaced by an electronic form of which the data will be transmitted to the central data warehouse. Field information will be obtained from preferably through portable handheld devices which will essentially replace paper information being manually faxed etc. However this is not essential as optical data software could be used that collects the data from paper reports. In figure 7.1 examples of data collection interfaces are provided, represented by circles.

Central Data Warehouse
All the project data is stored in the central data warehouse, represented in figure 7.1 by the square. For project data to be usable it will be structured in a way that can be usable but at the same time flexible. This is achieved by establishing primary key data within all the sub-systems. This allows for data to be linked between sub-systems for carrying out queries.

Because the construction process is prototypical and not repetitive each project will have its own distinct requirements. This can be achieved through creating an initial model that develops as the project progresses.

Because all the data is stored in a central data warehouse it will be possible to create functional rational between users and between user groups. This essentially adds controls to manage risk which will add to the efficiencies.

Management Reporting
The reporting will be carried out using business intelligence visualization software which queries the data using advanced linking and algorithmic methods. The data is then displayed using high impact visual graphics that is linked to the data. These reports are capable of being arranged in a dashboard which can be published to a server for the relevant managers to monitor and use for decision making.

The data warehouse will be capable of allowing unscheduled access, which will enable analysts to retrieve data and carry out bespoke queries and analysis. This will allow managers to make decisions systematically based on factual information that is flexibly acquired.

There is a vast range of types of reports that can be used on a construction project to manage various aspects of the process. Each project will have to be assessed and a management reporting system designed to meet the needs of the contract.

Before providing an example of how the management reports can be used it is necessary to explain these key concepts:
Key Performance Indicators
Key Performance Indicators are used to identify problems as they arise. Depending on the particular project key performance indicators can be formulated to highlight whether the required production levels are being achieved. These are all calculated using data from the project and therefore can be automatically calculated from the central data warehouse.

The standard of substantiation
It is recognized that in the real world the standards that parties adopt in substantiating valuations is often based on mutual common sense taking into consideration the circumstances of the parties. However if a dispute progresses to a formal dispute resolution process then a claim will need to be substantiated in detail to the standard required in formal dispute resolution procedures under English Law.

The standard of substantiating may have many facets however there are two general principles to bear in mind that must be incorporated into the system:
• The first principle is that he who asserts must prove the party claiming an item of cost or value will have to support it with evidence.
• The second principle is the general standard of proof in English civil law is that matters must be proved on the balance of probability as opposed to the criminal standard of beyond reasonable doubt. This principle is however in practice subject to a sliding scale where major and central parts of the issues require full substantiation while ancillary or subsidiary parts may be subject to a lesser degree of substantiation.

Example of a contract installing electrical equipment
In this example, of a simple installation of a high volume of electrical equipment over nine different locations, it is demonstrated how site installation data transmitted in real time is assimilated using business intelligence software in a format that managers can easily understand and use to make real time decisions based on facts to manage risk and change.

In this example Data Collection is achieved using a handheld mobile computer which is completed by the engineers and submitted at the end of every shift.

The key performance indicator for this example is each engineer is required to install 17 units per shift. If this quantity is not achieved then the programme will not be achieved and the contractor will essentially not be achieving the anticipated profit .

Interactive Management Report

Fig. 7.2 – Interactive management report: Scatter chart, Pie Chart and Bar Chart

Commentary on how the interactive management report can be used
From the scatter chart on the left it can be determined that the anticipated quantity of 17 units per engineer is not being achieved with the average productivity being under 12 units per engineer. From the pie chart it can be determined that just under 50% of the shifts are being affected by five categories of delays. Two of the main categories are installation at height and late isolations. From the Bar Chart it is then illustrated that five of the sites are being affected by late isolations and one site is being affected by installation at height through the colour coding. The project manager is now well equipped to notify the owner of these of the precise issues and arrange a meeting to correct the problem. At this point decisions can be made to correct the issues and because it is determinable if it is an owner or contractor responsibility action can be taken by the relevant party.

The charts are colour coded according to the category of delay. Using the above combination a manager can typically assess the issues. The shifts that are colour coded red are indicated as normal shifts where no delays occurred. It can be determined that there are a percentage of shifts that were the contractors responsibility because the key performance indicator was not achieved under normal working conditions. The project manager can then drill down further into the data to establish where the delays have occurred and the effects.

If the parties do not agree on responsibility for a particular issue then a party could make an assessment on the merits on how to progress the matter further. For example a contractor could quickly asses the impact on a particular issue and make a decision to either take mitigation measures or if he assesses that his case is strong he can make a weighted decision based on the facts to pursue an entitlement through a dispute resolution procedure.

Verification of electronic records
An important aspect of any electronic information system is to ensure the authenticity of the information when sending or receiving information or placing an order or instruction. Both parties need to know the sender of the message is the person they claim to be.

There is therefore a need to authenticate the identity of the sender to demonstrate the integrity and accuracy of the record, because it is important to know that the content of the record has not been tampered with and to prevent the person making a subsequent statement denying they made the statement.

To ensure the system achieved this it would have to comply with the Electronic Communication Act 2000 in respect of forming "electronic signature" and "individual certifying certificate" as follows:

An "electronic signature" is the incorporation of an electronic or digital method (comprising a numerical value using a known mathematical procedure associated with the private cryptographic key of the sender) to an electronic communication, which is unique to the person using it, is capable of being verified and linked to the communication in such a way that if the content of the communication is changed, the electronic signature is invalidated.

An "individual certifying certificate" means the individual certificate issued by a trusted third party (such as a certification authority), which purports to identify a natural or legal person and indicates that a public key and a private key has been issued to the natural or legal person.

Section 7 of the Electronic Communication Act 2000 makes it clear that electronic signatures, supporting certificates and the processes under which such signatures and certificates are created can be admitted as evidence in court. The Electronic Communication Act 2000 is flexible in that it does not mandate or specify particular formats or methods aiming to be neutral to the type of technology that may be used. The legislation covers all types of electronic signatures from those based on email exchanges to those based on cryptology or biometric technology.

Conclusion
Most of the respondents in the survey expressed that the construction industry would benefit from real time reporting. Two of the respondents identified that they use systems similar to the ones described. Some of the respondents thought that it would not be possible to implement a real time system due to the forever changing nature of construction and the associated costs and requirement for the system to keep up with the change. This investigation has found that the process can be achieved using standard software that has recently become available and already being used in other industries. Adopting this method means that basic principles of project management can be used effectively because the information would be available.

To implement a real time system of this nature would however require contracts to facilitate its use. For example to measure productivity in any contract the base would first have to be established. This is an area that has the potential to create difficulties that would still have to be overcome.

Conclusion (Chapter 8)

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Because of the nature of the construction process there are always going to be claims and a fertile ground for disputes. It also must be accepted that in a capitalistic commercial environment there are always going to be competing self interests, even under partnering arrangements.

Currently construction risk and change management to a large degree hinges on managers making decisions based on intuition as opposed to a systematic process. The industry is therefore reliant on experienced professionals, which is problematic as it relies on human nature. The main barrier to systematic decision making seems to be due to the lack of assimilated information because of the vastness of documentation which forever grows and changes throughout the life of the construction project.

It is often the case on construction projects that only after exercises of retrospective analysis has been carried out by lawyers and claim experts that the true picture is established. However with the advancements in technology this doesn’t have to be the case anymore.

The financial industry has used information technology, with great success, to provide an infrastructure where risk can be adequately managed. There are significant lessons to be learnt from the financial industry that are capable of being transferred to the construction industry.

There is a major opportunity for the construction industry to embrace information technology to manage its information more effectively. We cannot change the characteristics of construction where the seeds of dispute lie but we can speed up the process to identify problems, make sure the high quality decisions are made and resolve the resultant differences and disputes with the help of information technology.

The construction risk and change management process and the pathology of the arising disputes (Chapter 2)

2006-10-11T19:23:00.000Z

Introduction
Construction is a process whereby a contractor typically undertakes to carry out a specified scope of work for an amount of money that is fixed or for a variable amount of money determined using fixed rates. However when one considers how the scope of work is typically required to be changed in its implementation in construction one can begin to understand the dilemma the construction industry faces in managing the resultant risks and change. A major part of the construction process involves the management of this risk and dealing with change with the owner on the one hand demanding value for money and the contractor on the other hand aiming to achieve maximum profit.

Along the time line of the project there is typically a big focus on risk management at the pre-contract stage when the procurement method is defined and the contract is negotiated. A risk register is normally drawn up at this stage itemizing the probable risk but how are the risks that are defined at pre-contract stage then monitored and managed in the post contract stage?

The industry has come up with new methods of procurement to deal with the problems that arise in the construction process with the latest being partnering which has introduced a collaborative working environment between all the parties. However to what extent has partnering been successful in reducing the problems that arise in the construction process?

An important point to consider, as pointed out in Phillip Cappers article , is no matter what method of procurement or contract is used there are a number of characteristics which are common to, and largely distinctive of, almost all construction projects. It is generally in these characteristics that the seeds of eventual disputes lie. When change occurs parties will be faced with a process of agreeing on the liability and quantum. During this process it is inevitable that differences will develop from time to time. Parties will naturally have their own self interests to pursue which will almost certainly be conflicting. The clients self interest will be essentially be to pay as little as possible and the contractor will want to be paid as much as possible.

Commenting on the where the clues as to the causes of disputed matters Phillip Capper identified the problem that the construct industry faces with the diversity and sheer volume of evidentiary material.
Masses of record material are produced even on relatively small construction projects, many of them crucial as they are informal: such as eg the penciled scribblings of a gang member on daywork sheets, or mud stained card recording a piling set. Project records may be a diverse as site investigation reports, feasibility studies, specifications, drawings, tender submissions, estimating and pricing details, diaries, minutes of meetings, formal instruction, test data, payment applications and certificates, weather reports, job sheets, inspection reports, programming data and reports and so on. To all of that is added great chains of correspondence between the participants, managing report in each of the entities and the usual periphery of any business activity: from management accounting to press publicity. It is haphazardly in these various forms of contemporary records that are found the clues as to the causes of disputed matters.

If the causes of disputes can be identified by analyzing theses contemporary records then what steps are being taken to arrange these records on construction projects and their data in a manor whereby they can be used to identify problems in real time and enable managers to make systematic decision based on the facts?

Risk management in construction
This section takes a look at the current practice of risk management distinguishing between the pre contract stage and post contract stage. At each stage there are different dynamics at play. We try to understand the origin of differences with the ultimate objective of identifying how and when risks occur, what is needed to identify them quickly and what is the current process for resolving disputes.

Pre Contract Stage
At this stage there is a focus on risk identification and allocation. Once the risks have been defined they are allocated to a party. Depending on the circumstances the employer will choose a method of procurement that he anticipates will best suite the nature of the particular project. This process will largely depend on the circumstances of the owner and the influence of his advisors. The owner will generally employ consultants to investigate the risks and ultimately decide what method of procurement best suites the owner. For example an owner that is procuring a new telecommunication system which involves new technology may decide that operation and maintenance of such a system is best controlled with an expert party who has the necessary skills. This may be one of the reasons for an owner deciding that a Build Operate/Maintain and Transfer (BOT) procurement method is best suited. In another instance the owner might be highly skilled and sufficiently resourced in this area and therefore may decide on a traditional construct or possibly design and construct method and take responsibility himself for the operations and maintenance of the asset. It is not in the scope of this paper to delve deeply into this area however for each set of risks and circumstances there will be a method of procurement that is best suited or more appropriate. It is essentially dependant on the unique set of circumstances but it must be stressed that it is very important that the most appropriate method is chosen. If an unfavorable method is chosen this could exacerbate the management of the issues later on in the project.

Under traditional procurement the contractor is seldom involved at the pre contract stage and therefore does not have the opportunity to add to the upfront definition of risks, choice of procurement and allocation of risks. These are to a large degree imposed on the contractor. This has been one of the criticisms of the traditional adversarial approach. However under partnering the parties are encouraged to engage early in the project cycle to encourage early participation of the contractor.

Post Contract Stage
At this stage the emphasis is on monitoring the risks and managing them when they occur. The risks and change events on a construction project are vast and there is no standard for categorizing them and the way they are dealt with. This is probably because the dynamics of these events vary from project to project and are influenced by the environment, the procurement method, the contract that is being used as well as allocation that has been agreed, to mention but a few factors. In most cases risk and change are managed intuitively as apposed to systematically. The reason for this is thought to be largely because the construction process is prototypical it varies from project to project as apposed to the processes typical in the financial industry, for example, which are mainly repetitive.

For the purpose of illustrating this point we have provided on example of a typical way the risk of providing sufficient resource to complete a construction project on time is managed followed by an example of how change to a contractors access arrangements is managed. Both these events if not managed adequately could result in a delay to the programme which could result in a party either incurring liquidated damages or an entitlement to extension of time with costs.

Example A – Managing the risk of providing adequate resource levels
There will normally always be a minimum, optimum and maximum level of labour resource required to complete a defined scope of work within a fixed period of time. If the contractor provides a level that is below the minimum level he will not complete on time and consequently he will have to pay liquidated damages for being late. If the contractor provides a level of resource above the maximum level then he will start working inefficiently and therefore not realize maximum profit. Therefore he will aim for an optimum level where he completes on time and realizes the maximum profit. How is this risk managed? This risk is normally managed at site management level based on the opinion of an experienced manager. If the work is not completed on time how will it be decided if there was adequate labour resource to complete the scope of work within the defined timescale? Essentially if it is can not be agreed between the parties there will ultimately be a retrospective delay analysis prepared based on the contemporaneous records and a comparison will be made with the contract programme.

The above is a simplified version of a scenario that in practice is normally much more complicated. The purpose of the example is to point out the disparity between the way decisions are made on managing risk and the way liability if determined in the event that the risk matures.

The above examples of risk and change are simplistic but even these simple issues on a big scale can become extremely difficult to manage on a big complex projects without adequate systems being in place that collect and analyse the contemporaneous records.

Strategies that construction companies adopt for managing risk
It is evident that some large construction companies actively pursue an overall high risk / high return strategy on the basis that there will be some loss and some profit. Smaller companies tend to spread their risk, in order to reduce it’s overall effect, at a lower rate of return. They cannot afford to pursue a high risk strategy because of the effect of failure.

This practice in the construction industry results in contractors being generally complacent in the area of real time risk management and have adopted a high level approach to risk management.

The decision making process in the construction industry
The decision making process in construction is to a large degree based on the intuition of decision makers rather than a systematic approach. Intuitive decision making involves making decisions with no immediate factual rationale and is to a large degree based on the experience of the decision maker. Where culture and experience exist in a stable environment intuitive management can perform reasonably well according to some studies. However the complexity of contractual relationships and increasing size of the mega projects that are undertaken and a host of other reason means that the intuition method of decision making is only reliable to a degree and very dependant on key personal.

Gary France in his article on controlling time in construction emphases the importance of analysis and management in the controlling of risk in construction projects. However he said that the use of computer systems like Monte Carlo which carry out simulation tests based on random probabilities are totally meaningless. He goes on to say that mathematical or quantitative risk management is the most reliable.

What other choices does the construction industry have in this respect. Would it be possible for a construction company convert to a systematic approach to decision making considering the nature of construction projects being one-offs and unique the amount of investment required to develop a system to fulfill this function for a one-off project may be perceived to outweigh the benefits.

Pathology of the arising disputes in construction
Contracts are designed to identify problems at an early stage. This is normally through a notification process advising the party a problem that could or will result in a claim. This is no coincidence as the earlier problems are identified the more chance parties have in sorting the problem out by taking corrective actions. If the parties fail to resolve their differences it will more than likely develop into a dispute. For a frustrated claimant it is necessary for a dispute to have arisen before it can be referred to adjudication . We therefore look at the process of how disputes manifest themselves and then how they are resolved.

The manifestation of disputes
A common tactic in construction disputes is to argue that no dispute exists, therefore it is important to distinguish between a dispute and a difference. The fundamental distinction between a difference and a dispute is a situation where a claim has been rejected, in part or in whole, or has simply been ignored by the other party. Where no dispute has in fact occurred will depend on the facts of the case. In Fastrack Contractors v Morrison Construction (2000) Judge Thornton QC stated
A dispute can only arise once the subject matter of the claim, issue or other matter has been brought to the attention of the opposing party and that party has had an opportunity of considering and admitting, modifying or rejecting the claim.

A dispute is different to a disagreement in that a claim may have been submitted however it has not yet been agreed or rejected. It is possibly in the stage where the contract administrator has acknowledged the submission but has requested further substantiation or details before he can make his decision. This can be a lengthy process. Even for a relatively minor difference between parties can take months or years with further information being requested and this process recycling a few times until either adequate information is provided or alternatively a deal is made that both parties can live with. Where the parties have not been empowered to make decisions, for example this sometimes occurs when large amounts of public money is being used to fund projects, the issue is normally protracted and then finally when it becomes apparent to the claimant that there is a dispute that is not going to be settled through a non-coercive process it is referred to a coercive dispute resolution process.

Felstiner, Abel and Sarat put it this way; that all disputes go though specific transformations. The process of naming, blaming, claiming and dispute. The naming stage recognizes an experience as injurious and labels it as a problem. The blaming stage attributes the cause of the problem to another person. The claiming stage is when the grievance is voiced to the person believed to be at fault. The dispute stage occurs when the other person rejects the claim, in whole or part or ignores the claim.

How disputes are settled
The importance of contemporaneous records in the dispute process was considered in the case of Attorney General for the Falklands Islands v. Gordon Forbes Construction (Falklands) Limited (2003). A contract was let using the FIDIC 4th Edition conditions which like most standards forms provide a procedure for submitting claims. The first principle being to provide notice of intention to claim within 28 days after the event occurring and the second obligating the contractor to keep contemporaneous records necessary to support the claim. The contract went a step further requiring a detailed account of the claim to be issued within 28 days from the first notice. In the event of the contractor failing to provide a detailed account of the claim the contract provided for a fall back position stating that the contractors entitlement will not exceed that amount the engineer or arbitrator could consider verified by contemporaneous records. The events that unfolded on site were typical to the industry with the contractor failing to provide a detailed account of a claim within the required timescale. A dispute then developed because the contractor did not have sufficient records to satisfy the requirements of the fall back position. The judge considered that the requirements of the contract were clear and ordered a way with dealing with the claim. Claims have to be notified at the time they arise, contemporaneous records have to be kept and regular accounts redendered. The judge explained that the whole contractual system is aimed at the early resolution of any queries at the time the claim arises. He ordered that where there are no contemporaneous records the claim would fail.

Non coercive dispute resolution process
It has been established by survey that negotiation is by far the most favored method of resolving disputes in the construction industry. Negotiation is a non-coercive process of communication which ultimately leads to a joint decision. Goldberg described negotiation as “communication for the purpose of persuasion; the pre-eminent of dispute resolution”. Negotiation in its broad sense is more that just the process of dispute resolution it may be considered as the process by which individuals communicate in order to arrange their business affairs and private lives by establishing agreement and reconciling areas of disagreement.

Negotiation is the principle method of dispute resolution in the construction industry. Gulliver maintains that negotiation is essentially a development process with eight distinct but often overlapping phases:
Phase 1 – the search for the arena
Phase 2 – agenda and definition
Phase 3 – exploring the field
Phase 4 – narrowing the differences
Phase 5 – preliminaries to final bargain
Phase 6 – final bargain
Phase 7 – ritualizing the outcome
Phase 8 – execution of outcome

Gulliver asserts that negotiation is developmental because the early stages involve predominance of antagonism while the later stages involve a predomination of co-ordination. Roberts on the other hand asserts that negotiation is about communication and information exchange which leads to a joint decision. As the parties begin to explore their differences, the information exchange which occurs leads to a greater understanding of the situation. This can either lead to a convergence of opinion or abandonment of the negotiations. If real time data was available could this process be radically accelerated?

The process of negotiation on a construction project clearly is dependable on information availability and / or the ability the parties have to assimilate large amounts of information which involves data collection and analysis as well as the understanding of principles that establish liability and measurement of quantum.

To what extent is the reason for differences evolving into disputes on major construction projects down to the large amounts of documents that need rationalising? If the information was readily available and if managers had the skills or advice to define the principles to establish liability and measure the quantum would the majority of problems / differences develop into disputes or would they be resolved?

Coercive dispute resolution
Adjudication, arbitration and litigation are coercive processes but adjudication is not final and can be challenged if the losing party is not satisfied. Arbitration is final and binding and litigation is final and binding with scope for appeal.

In 1998 the Housing Grants Construction and Regeneration Act 1996 (the Construction Act) came into force. Prior to the Act neither litigation nor arbitration provided the speedy resolution of disputes which are often required in the construction industry. Typically prior to the Construction Act standard contracts could provide that litigation or arbitration could not be commenced until practical completion therefore disputes could be left unresolved for the duration of the contract. The Construction Act now makes adjudication available for parties to resolve any dispute arising under the contract at any time with a decision being given within 28 days of appointment. While this legislation has been a positive move for the construction industry it has created difficulties for parties when unmanageable quantities of relevant information have to be dealt with .

Essentially the rationale behind the concept adjudication in the construction industry is the provision of quick, cheap summary procedure. Adjudication jurisprudentially is similar to certification by an architect or engineer and is a second tier of evaluation that is made if the parties dispute a contract administrators determination. An important point is it aims to resolve disputes speedily because cash flow was described as the life blood of the industry by Sir Michael Latham.

The same trends and pursuit for speeding up proceedings can be seen in the sphere of litigation. In June 1996 Lord Woolf published a review of the civil justice system saying that it was too slow, too costly and too complex. The objectives of the pre-action protocol encourages the exchange of early and full information about prospective legal claims to enable parties to avoid litigation by agreeing a statement of the claim before commencing of proceedings.

In arbitration the trend of speed is further continued. The Arbitration Act 1996 where the parties have the choice to decide on the degree of formality they desire, how much time will be allocated to various aspects of the process and how documentation, discovery and the taking of evidence will be handled.

Essentially an objective of the 1996 Arbitration Act being to ensure that the process is fair, cost effective and rapid; to promote party autonomy; to ensure that the courts supportive powers are available when required etc.

Conclusion
It is clear that there is a long drawn out period from when the a claim is initially raised to when the parties are in a position to resolve the matter. This is indicative that the parties do not know much about the dispute when a claim is first made. Probably the only thing that is known at this stage is that the target profit margins are not being met. This is then followed by a long and drawn out process of retrospective analysis to define what went wrong, who is to blame and how much is due.

The management of risk and change in the construction industry is currently based mainly on intuition as apposed to systematically. This exposes the parties to the risk of the wrong decisions being made that are not reconcilable with the retrospective analysis carried out by the lawyers after the event. This leaves the construction industry in the dilemma where the real answers are only arrived at much to late to deal with the problem and prevent disputes but in time to resolve the dispute but hence at a cost.

In terms of the dispute resolution it seems that an adequate framework is in place to speed up the process through adjudication to a large degree as well as arbitration and litigation with the latest reforms in the law. However it seems as the industry is lagging behind and not capable of taking full advantage of the new changes.

Managing the risk of dispute in construction and the influence of information technology (Chapter 1)

2006-09-17T07:34:00.000Z

Quotations

“Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often a real loser – in fees, expenses and waste of time. ”
Abraham Lincoln

“A party to a dispute, particularly if there is an arbitration will learn three lessons (often to late): the importance of records, the importance of records and the importance of records”
Max Abrahamson

Chapter One - Introduction and Context
Introduction
The Pyramid of Cheops at Gizeh in Egypt, the Taj Mahal in India, the Great Wall of China are amongst the greatest, most spectacular structures ever created, built in times when resources were inexpensive and abundant. Centuries later the world and it’s inhabitants have changed. Mega projects are still undertaken but the lack of resource, the cost of money and the profit motive in construction has resulted in projects being primarily commercially driven. When a new hospital, a telecommunication system, a railway or a power station is commissioned it will be expected to be commercially viable, however with advancements in society the commercial risk increases and intensifies. Will our current attitude and approach be adequate for a construction industry of the twenty first centaury?

This paper is a study of the management of the risk of dispute in construction and the influence of information technology. Why is this subject important and central to progression in construction industry? One only needs to take a look at the characteristics of the construction process which are “one off” or prototypical nature, involves interface with existing infrastructure, involves site specificity and normally involves exposure to the elements, to name but a few, to realise the construction process is hugely dependant on the effective prevention and resolution of disputes. Pertinently Phillip Capper said in his paper titled “Why are there so many Arbitrations in Construction, commenting on the distinctive features of construction”.
“Whatever contractual documents are used there are a number of characteristics which are common to, and largely distinctive of, almost all construction projects. It is generally in these characteristics that the seeds of disputes lie, and which explain not only the higher occurrence of disputes in the industry, but also the traditional particular mechanisms for their resolution.”

If it is the nature and characteristics of construction where the seeds of dispute lie then is the industry adequately served with the necessary tools implemented by the latest reforms to deal with the issue of disputes or is there more need for research and development into methods and techniques in prevention rather that cure once a dispute develops?

Recent Developments
The importance of a healthy construction industry was recognised by the government when they commissioned Sir Michael Latham to investigate the problems in the construction industry. The Latham report extolled the virtue of creating a conflict free climate for construction. The need for finding ways to deal with disputes and differences quickly and efficiently in a way that has a minimum impact on the works has been recognised which have manifested itself in a number of ways in recent years:

• Legislation in the form of the Housing Grants, Construction and Regeneration Act 1996 and the Late Payments of Commercial (Interest) Debts Act 1998 which have sought to create a fairer climate for doing business with the intention of reducing the number of disputes.
• The growth of partnering as a means to promote conflict free procurement of construction projects together with a commitment to fairer and simpler forms of contract.
• The Woolf Reforms is a major overhaul of the procedure of civil justice and seeks to simplify the administration of the court system and create a civil justice system which is quicker, fairer and more accessible.
• The reform of the arbitration system by the Arbitration Act 1996 which aims to create a more efficient climate within which to administer arbitration.
• The development of adjudication and ADR as means to resolve disputes without the need for full rigours of arbitration and litigation.
• The use of the Technology and Construction Court of the Pre Action Protocol for construction and engineering disputes. This requires the production of the intended claimant of a detailed letter of claim, setting out in detail the basis of claim. The defendant is required to meet to attempt to narrow the issues of dispute. The purpose of this protocol is to encourage the parties to discuss their respective positions in detail prior to proceedings.

Two distinct themes have emerged from this new regime, firstly an attempt has been made to find ways to reduce the traditional adversarial approach and make way for collaborative ways of working in a partnering environment. Secondly the recognition that resolving differences and disputes that inevitably occur is a facet of commercial life in the construction industry, therefore machinery has been put in place to deal with disputes.
To what extent has this new regime achieved its aims and what more can or should be done in pursuance of a conflict free climate in the construction industry? For example to what extent has partnering achieved the goals that it set out to achieve and how has adjudication helped to deal with disputes quickly? Have any new problems emerged or have any deficiency points become evident from these reforms with the shift in dynamics in the construction industry?

The objectives and approach
This paper aims to analyse the implications of the new regime on the construction industry and identify the problem areas and deficiencies that have emerged as a consequence of the new regime or still in existence from the old regime. The paper then aims to make practical recommendations by using lessons learnt from the financial industry with consideration given to the special needs of the construction process, the theory of risk management and the legal principles used in the resolution of disputes. To achieve this, the paper has adopted the following process:

The construction process and the pathology of the arising disputes.
An analysis of the construction process and how disputes originate in the construction industry is made to be used as a baseline for a comparison with the general theory of risk management and the ways risk is managed in the financial industry.

The theory of risk management and risk management in the construction industry.
An analysis of the theory of risk management is made for a comparison to be made with the way risk is made in the construction industry. This is important because due to the nature of construction some areas in the process become extremely difficult and therefore expensive to manage sufficiently.

Risk management in the financial industry and the shortfalls in the construction industry
The financial industry was chosen because of the recent advancements that have been made in operation risk management since the collapse of Barings bank in 1995 through the actions of a single rogue trader. The paper then explores to what extent the methods and techniques from the financial industry could be beneficial to the construction industry.

The unique nature of construction and the role of disputing
This chapter looks at the unique challenges the construction industry faces and the need to understand these unique problems to manage them effectively. The unique characteristics of construction must be taken into account when consideration is given to adopting methods and techniques used in the financial industry.

The requirement for application of legal principles in construction management
For problems to be solved the legal principles associated with the particular problem, if in existence, must be known in order for corrective actions to be taken. The legal principles for resolving disputes are often vast, however this paper uses a few examples of the problems that occur on construction projects and it is demonstrated how they can be used to make decisions and prevent or manage risk thereby improving efficiencies.

Hypothesis for an integrated construction management system
Based on the above elements a hypothesis is developed using the methods and techniques from the financial industry adjusted to dovetail with the special needs of construction, which results in an integrated project management system using information technology. This hypothesis is then tested and it is contemplated whether it is feasible for such a system to be implemented.

Conclusion and outlook for the future
A view is taken on the future of the construction industry and the role of information management. Consideration is given to the opinions of construction professionals on use of real time data and analysis in the prevention and resolution of disputes in construction, from a survey that was undertaken.

What value can be gained from understanding different legal systems approaches to issues arising in construction projects?

2006-04-06T20:33:00.000Z

Introduction
As globalisation becomes more and more evident the emphasis of transnational trade is increasing. Procurement methods are changing with major infrastructure construction projects being financed in fundamentally different ways from traditional construction projects. The structure of a major infrastructure project will consist of many different contracts between parties of different nationalities, with one of the parties normally a government body. This structure by nature may bring a kaleidoscope of different legal systems into the equation. To manage the legal risks of the project structure it is essential to understand the dynamics of the legal systems that determine or influence the rights and obligations of the parties. If the legal systems or the effects that they may have to the eventual cost of the project are not understood projects could end up costing more and therefore compromising the value or benefit of the project.

It is proposed that even in traditionally structured construction projects with no international element there is value in understanding different legal systems and their approaches to issues that arise, in order to better understand ones own system[1]. In England issues have arisen in construction projects where it seems that the legal system does not have the ability to provide an acceptable solution or answer to the problem. An example is the Pannatown v McAlpine[2] case where the dispute went through the courts all the way to the House of Lords as there was essentially no straight forward answer to the question of who had suffered loss as the employer was not the owner of the building, that was defective. There initially seemed to be a “black hole” of liability due to the rules of privity under English Law.

Due to the nature of construction projects they are prone to certain issues arising from time to time. It is important for these issues to be managed to essentially define the risk exposure of the parties concerned. This is one of the functions that a contract aims to fulfil, however it is necessary for the contract to be assigned to a legal system in order for the parties rights and obligations to be defined under the particular contract and in connection with the contract.

This paper explores what (if any) value and benefit can be gained from understanding different legal systems approaches to issues arising under construction projects from the perspective of both domestic construction projects and major infrastructure projects, which generally are of international nature.

Domestic Construction Projects
For construction projects with no operative international elements, value can be gained in understanding other legal systems approaches to issues that arise, in order to better understand one’s own system. For example France, Italy and Germany all have Civil Codes whose construction law provisions are consistent with the rules of Roman Law governing location and obligations. Much of this derivation has had positive effects, with coherent development of rules comparing favourably with the growth of English Law as a self contained body of law based on obligation. There may be slight differences but essentially the main principles are similar with the way in achieving them being the main differentiating factor. This kind of understanding provides headway for harmonisation of laws.

By understanding other legal systems and the way they deal with issues arising under construction can provide valuable insight into the deficiencies of ones own system[3]. The French Civil Code Art.1972 is the main solution to the tort law problems suffered by all sides of the construction industry in the UK. It is a solution not in the sense that it limits liability. On the contrary, the solution is to provide a regime where almost everyone is liable, but they are aware of their responsibilities, as they are written down in an accessible form. It is a solution in the sense that there are many options for the employer for the same problem. For example when settlement of foundations occurs the engineer cannot say that it was a defect in the workmanship and not the design and that the contractor has ceased to exist which before Murphy in English Law, would have at least caused the employer to look at the local authority with its claim. In French Law in the case of defects caused by several constructors not contractually related to each other but resulting in the same damage the French Courts would hold them jointly and severally liable towards the employer.

Major Infrastructure Construction Projects
For construction projects that involve parties from different legal systems it may be necessary for the contracts to be assigned to one specific legal system in order for the parties’ rights and obligations to be defined, as different legal systems will vary. If it is left to the conflict of law rules to decide on which legal system apples to the contract, the outcome is often inconsistent.

The source of the problem is that there is no world law or court and no universal rules on courts jurisdiction, recognition and enforcement of judgments and arbitral awards. There are approximately three hundred and nine legal systems which vary from civil law systems to common law systems or a mixture to varying degrees of both systems as well as different Middle Eastern law and its many variations. Between these legal systems there are conventions or treaties that are open for signature. In Europe there is European Community Law with legislating body in Brussels as well as the European Court of Justice. However this law is limited and has not fully developed and therefore for this reason and other reasons, to have a reasonable degree of certainty in the way issues are dealt with it is necessary to express the choice of law. In this way parties can assess the choice of law in respect of certain issues that could rise out of the contract or in relation to the contract to obviate or manage their exposure to risk. The Rome Treaty provides for the contracting states to have the choice of law therefore at face value it may seem straight forward for a party to simply choose a particular legal system and only have to be concerned about that particular legal system, however it is not quite the case as there could still be a number of different legal systems to consider.

Ideally the construction project will be implemented under an established legal system that is transparent, certain and enforceable. However the structure of major infrastructure projects is a complicated affair. A typical structure could comprise of a Concession Contract let on behalf of the State (for example, by a particular Ministry or Treasury or by an Implementing Agency set up by the State for this purpose, though invariably backed by the State) with a Project Company. The Project Company will be a Special Purpose Vehicle financed by lenders and private equity investors. Typically an independent engineer arrangement will be required to ensure that such matters as construction completion are properly certified on a fair basis as between the State, the Project Company and the Lenders etc. The Project Company will have a myriad of different contracts for example for the Construction, the Operation and Maintenance, the Off-Take Agreement and Insurances etc. There could also be many sub-contracts linking in to the Main Construction contract etc.

By understanding the applicable legal systems of all the applicable contracts a party will be able to assess their rights and obligations as set out in the contract documents and if necessary, could be enforced ultimately through the local courts or in a jurisdiction where a particular parties assets are.

Although parties may choose the law, inevitably the project will in some way be influenced by the local law. It is often the case that even when the parties make a conscious decision to choose the applicable laws relating to the contract, the law of the location of the project may override what they have agreed. In England and Wales the Housing Grants, Construction and Regeneration Act 1996 (HGCR Act 1996) imposes compulsory rights and obligations to construction operations, as defined under the HGCR Act 1996. For an international construction company operating in England and Wales it would be imperative to understand how the HGCR Act 1996 would affect their operations.

For an international construction company engaged in a construction contract with the Ethiopian government and who has chosen arbitration as the principle dispute resolution mechanism they could be in for a surprise when they find out that the Ethiopian Civil Code although fully recognising arbitration, states that arbitration in an administrative contract is not binding. This could have a devastating effect on a party who could ultimately be left without an acceptable form a dispute resolution.

At the negotiation stage a party will be at an advantage if they understand all the different legal systems that will influence their contract and how they deal with the issues arising in construction projects. For example in civil law jurisdictions as opposed to common law jurisdictions many of the issues that arise in construction projects are dealt with in the code and therefore there would be not much point in expressing them in the contract.

There may be some anomaly in the law which could result in the desired effect not being achieved. For example it is common for manufactures and suppliers in civil law countries to exclude gross negligence from limits on their liability in a contract governed by common law, which may have an uncertain effect or possibly none at all, because at home that limit may be imposed.

When the parties decide on the method of dispute resolution they will ideally want a neutral platform for the dispute to be resolved which is a reason why arbitration is often the preferred mechanism for resolving disputes.

The arbitration framework will consist of various applicable laws which may need to be considered, any relevant rules as well as the international conventions and treaties that are relevant.

A number of systems of law may simultaneously have some application to an international commercial arbitration. They will include amongst others the law applicable to determine the capacity of a party to enter into the arbitration agreement, the arbitration agreement itself, the arbitration proceedings, the dispute itself and the enforcement of the award. In an international construction project it will be of great value to understand the different legal systems that could come into play and negotiate a deal that is most beneficial and identify any risks and make adequate provision for the necessary management.

A party to an international contract should have particular interest in the legal system of the state where the debtors’ assets are located should it become necessary to enforce an arbitration award and whether the state is a contracting party of the New York Convention 1958. That law will determine not only the procedure to be adopted for applications for recognition or enforcement, but also the defences to any such applications. It is important to understand beforehand if the law of the potential place of enforcement could prove to be onerous as an award will be useless if it ultimately cannot be enforced.

Conclusion
Understanding different legal systems approaches to issues arising in construction projects is valuable in the sense that in domestic construction projects there may be areas which are more effectively dealt with in other legal systems and therefore there is scope for lessons to be learnt. In international construction projects it is valuable in the sense that understanding the differences may help towards harmonisation of laws as well as identifying legal risks that could result in major costs being incurred, if not adequately managed or dealt with.

Notwithstanding the above when comparing different legal systems it often becomes evident that the overall principles are similar and essentially the difference lies in the ways of reaching the same conclusion. Be that as it may it seems that there is more to value to gain in understanding different legal systems than to not understand them.

[1] Aspects of comparative law by Christopher Thomas
[2] Alfred McAlpine Construction Ltd v Panatown Ltd [2000] BLR 331, HL
[3] Civil Law Solutions to common law tort problems, Jeremy Winter.

Is Delocalised Arbitration a Viable Option in International Commercial Arbitration?

2006-01-07T16:44:00.000Z

Introduction
The law governing the international commercial arbitration involves a complex interaction of various systems of law and legal rules. One of these systems, the lex arbitri or curial law, concerns the existence and proceedings of the tribunal. This body of law is very important as it sets out a standard external to the arbitration agreement for the conduct of the arbitration. It is this body of law which empowers the exercise by the court of interim measures, supportive measures and controlling measures to assist arbitrations which have run into difficulties. Delocalised arbitrations concern arbitrations that are detached from the lex arbitri.

In domestic commercial arbitration as opposed to international commercial arbitration the body of law that governs the supportive and supervisory powers of the courts is contained to the law of one state. There is therefore a level playing field in so far as there is one lex arbitri to deal with. In contrast, in the international commercial arbitration arena, where there is a dispute between two parties of differing nationalities, there could involve multiple bodies of lex arbitri in both the proceeding stage and the enforcement stage thus changing the dynamics of the arbitral process. The parties potentially could be subjected to a myriad of foreign law that was never intended in the first place by the parties. For example some states have law that prevents certain matters being referred to arbitration and parties could find themselves in a dispute over the arbitrability over the subject matter of the dispute. A state may determine other limitations upon the arbitral process; whether, for instance the arbitral tribunal has the power to compel the attendance of witnesses or the disclosure of documents and crucially whether or not any appeal to the national court is possible and if so how and when and upon what terms.

Traditionally there is a concept that an arbitration is governed by the law of the place in which it is held, which is the "seat" of the arbitration. This theory is well established and has influenced the wording of international conventions from the Geneva Protocol of 1923 to the New York Convention of 1958. The Geneva Protocol states "The arbitral procedure, including the constitution of the arbitral tribunal, shall be governed by the will of the parties and by the law of the country in whose territory the arbitration takes place". This is an example of the concept of dualism in international commercial arbitration practise. On one hand the parties have a considerable degree of autonomy in respect of the way in which the arbitration is conducted, with the parties being free to decide on the procedural rules they wish to adopt, expressed by their will. On the other hand the law of the country in the territory where the arbitration takes place, the lex arbitri, possessing the powers to support the arbitral process and to intervene where required.

The New York Convention refers to the law of the country where the arbitration took place and synonymously to the law where the award was made which continues the theme of the link between the territory of the place of arbitration and the law governing the arbitration. The Model Law continues this theme and states that it's provisions, apart from some exceptions, only apply if the place of the arbitration is the territory of this state. The relatively modern laws of England and Switzerland are also clear with this dualistic approach. Therefore it can be seen that the seat of the arbitration is not merely a matter of geography, it is a territorial link between the place in which the arbitration is legally situated and the arbitration itself. The strength of the seat theory is that it gives an established legal framework to an international commercial arbitration so the arbitration is firmly rooted in a given legal system.

The fact that different states have different lex arbitri which will govern an international commercial arbitration held in its jurisdiction, means that the site for the arbitration seat is of great importance. This is true because there may be some mandatory laws that will have to be complied with which may not suit the objectives of the parties in an arbitration and therefore not every country would be suitable.

In so far as international commercial arbitration is concerned, it would save considerable time, trouble and expense if there was a universal lex arbitri and thus level the playing field in this particular area. This particular ideal however is near impossible as each state has it?s own objectives and national characteristics to protect as well as it?s own philosophies of how arbitrations should be carried out.

This conundrum has given birth to the delocalization theory which attempts to overcome the difficulties faced by international parties in an international commercial arbitration. The theory argues that to solve the problem an international arbitration proceeding should take place in a legal vacuum totally detached from the national law of the place in which it is held. The only point of court control should be at the place of enforcement. In this way international commercial arbitrations could take place in just about any state and the international commercial arbitration itself would be transnational or delocalised. This concept is contrary to the dualistic system of control by the lex arbitri whereby the courts of the place have considerable supervisory and controlling powers over the proceedings and at the enforcement of the award.

The issues considered
To comprehend and weigh up the competing points of the debate whether international commercial arbitration should exist in a transnational universe or conversely to be rooted in a defined seat and be subjected to national law of the state a general understanding is required as to why parties choose arbitration in the first place.

The principle binding forms of dispute resolution are national courts or alternatively arbitration. When parties of different nationalities decide between these two forms they will consider neutrality of the forum and enforceability of the award in not only the place where it is made but also internationally. Arbitration is the only forum that can provide both of these requirements. This statement is made with reservation however as other factors will obviously play a part and not all arbitrations will fulfil these requirements.

National courts on the other hand do not meet the criteria as their awards will not be internationally enforceable. International commercial arbitration awards where countries are contracting states to the New York Convention will have the benefit of being able to enforce their awards at an international level. Parties will want to have control to some degree over the costs and agree on processes that are adequate and suitable for the particular dispute. Some parties may consider that confidentiality is an important criteria and for this reason will not choose a national court as their award would then be made public. Another factor which may or may not be foreseeable at the time of decision might be that third party involvement in the dealings between the parties could mean that third parties might have to be compelled to preserve or give evidence. This could be a crucial deciding point between a delocalised arbitration and an arbitration with a seat.

One of the main requirements parties would have would be that the eventual award must be enforceable. In international commercial arbitration there will have to be some kind of applicable treaty or convention in the state where the parties have assets sufficient to satisfy the possible award. The treaty or convention must also be capable of recognising the award as enforceable. When parties have the opportunity to choose between a delocalised arbitration or an arbitration with a seat they will have to ensure that the award will be enforceable. The New York Convention 1958 which most international commercial arbitrations rely on for enforcing foreign awards sets out accepted minimum standards for the recognition and enforcement of arbitral awards agreements in territories of the contracting states (states that have acceded to the convention). Under article 5 of the New York Convention enforcement may be refused by the country where enforcement is sought for certain reasons however the question to be asked is whether any national law could cure the risk that another nation will not enforce the award.
The Singapore Arbitration Act excludes delocalised awards and therefore if the assets of a party that where being relied on were in Singapore they would be protected from delocalised arbitration. In Belgium the reformed law gives the parties the opportunity to decide between delocalised arbitration or an arbitration with a seat. The English Arbitration Act 1996 section 66 (2) empowers the court to give a judgement in the terms of the award, thereby allowing the judgement rather than the award to be enforced. It is not certain that a judgement entered under this provision in the same way as any other English judgement and the principle would appear to undermine the whole basis of enforcement of arbitral awards. The UNITRAL Model Law Article 35 suggests that an arbitral award shall be recognised as binding irrespective of the country in which it was made. So it seems that if parties contemplating between delocalised arbitration and arbitration with a seat should first and foremost be sure that it would be possible to have an enforceable award in the intended country.

Further issues that need consideration when weighing up the choice between delocalised arbitration and an arbitration with a seat would be supportive provisions including conservatory measures and interim relief measures.

Where intervention is needed to preserve evidence in possession of third parties or to compel witnesses to provide evidence the arbitral tribunal will have no jurisdiction and therefore the national courts are essential to provide the support necessary to ensure natural justice is achieved.

Circumstances may arise where a party may feel that the tribunal has breached a duty. In these circumstances they may seek to have the tribunal removed. For example in the case of an arbitral tribunal with its seat in England and Wales the lex arbitri requires the arbitral tribunal to act impartially and there is a mechanism by which the arbitral tribunal can be challenged in a court action.

If the arbitration was delocalised, a party would have no recourse to the courts should they feel there had been a breach of a duty or that the proceeding was being carried out unfairly. If however the arbitration was under the administration of an institution the institution could have the power to remove the arbitrator. This institution could also place some kind of sanction on the arbitrator excluding him or her from being appointed from their panel in the future.

Conclusion
It is therefore questionable whether the involvement by the court is really necessary or perhaps more appropriately it could be said that it would be beneficial to define the point where the reliance of arbitration on the courts should begin and end.

The debate whether arbitration should have a seat and be exposed to national law or alternatively be delocalised is fuelled by factions with many different interests therefore the debate will continue to be vicious so long as objects differ. For sure the authors of articles to have their own objectives and therefore for parties deciding between delocalised arbitration or arbitration with a seat should carefully weigh up the pros and cons as well as consider their own objectives, without being influenced by motives that do not matter to them.

In theory one could look at the hierarchy of governance starting with the national court at the pinnacle, then the institution (if applicable) and then the arbitral tribunal. The ultimate sanction will always lie with the national court and therefore it could be said that it is impossible for the courts to be totally excluded from the equation. However in practise this is not always the ultimate deciding factor. The pro delocalised side would argue that the court is not being totally excluded as it would govern the second phase of the process i.e the enforcement. This concept does have its merits however first the arbitration proceedings will have survive with out the courts support maybe being subjected too sabotage tactics by a party who is un co-operative and manage to actually successfully reach an enforceable award in accordance with the New York Convention 1958 or another mechanism which provides for cross border awards

There are thus strong arguments from both sides. However it seems as there could be a place for both systems. For a party wanting to play it safe generally recent trends have favoured the seat theory and this is highlighted by the outcome of the Belgium's courts decision to make delocalisation compulsory. For a party up against an opponent with strong state ties perhaps a transnational forum could be more important to them as it may seem more neutral than one linked with a state.

In reality the delocalisation of arbitrations is only viable if the local law permits and for example in bilateral investment treaties etc. It also says a lot that when Belgium changed it laws to make delocalised arbitration compulsory it actually discouraged parties from choosing Belgium as the seat of the arbitration and now the law has been changed.

Building Defects ? How do we manage them

2005-07-10T18:17:00.000Z

Because of the stratified nature of english law it is often the case where authority will have to be assimilated from various sources in order define the current law and still this approach may not provide a definitive answer. The law relating to building defects is an example in this respect, with authority derived from common law, statutory law, European law and what parties have agreed in their contract as well as duties being owed in tort. It will often be necessary to interpret what the law is in context of the particular circumstance with regards to all the relevant sources.

Common Law and Statutory Rights
In the expansion period of the law of negligence in the case Anns v Meron London Borough (1978) the claimants house had been badly built and the defective foundations had caused cracking in the walls. This might at first sight appeared to be a case of damage to property but the courts have traditionally been insistent that a defect is not the same thing as damage: where a product is defective in its manufacture claims may only be made for any personal injury or damage to property as a result, but not the defect itself, which is considered economic, since the loss arises from the reduced value of the object. The House of Lords never the less decided to view cracks in wall as damage to property rather than pure economic loss.

This was followed by Junior Books v Veitchi (1983) which is considered to be the peak of the expansion period in the law of negligence the House of Lords held that despite the existence of a contract, builders owed factory owners a duty of care for a defective floor, despite the loss being purely economical.

The situation after this meant that claimants could recover for economic loss caused by statements under Hedley Byrne v Heller and for economic loss caused by negligent acts under Junior Books. However in Murphy v Brentwood District Council (1990) which concerned a defective building the House of Lords put a stop to the possibility that defects in products could be seen as damage to property. This affirmed that defects were to be regarded as economic loss and that they could not be compensated in negligence.

This has left the Defective Premises Act 1972 to provide the principle right of redress outside the field on contract. The act creates a general duty on persons to see that work is done in a workmanlike or professional manner, with proper materials and so that the dwelling will be fit for habitation. The act therefore creates a statutory duty similar (although wider than) that which the the courts had sought to impose under the law of tort, and also provides what may be regarded as a fair limitation rule, which has no need of a longstop provision.

Standard Forms
The JCT uses a Code of Practice for discovering the extent of defects, without running the risk of having to pay where work is found to comply with the contract, however there is no power to order replacement of defective work; this obligation remains on the contractor by virtue of obligation to complete the works.

Independent of the contract the work must comply with various statutory requirements and difficult questions arise in the event of conflict between these requirements and the architects design. Provided the contractor adheres to the contract documents his obligation is limited to giving notice to the architect of any breach of statutory requirements which he in fact discovers. The additional cost of taking down and rebuilding work so as to comply with byelaws is then likely to fall on the architect if it is shown to be his fault. The contractors obligations are generally limited to physical performance of the work described in the Contract Documents.

Under the ICE contract the engineer has extensive powers to instruct the contractor, during the progress of the work, to remove from site any materials that are in his opinion not in accordance with the contract, substitute materials and the removal and proper replacement of any work which in respect of workmanship or design by contractor is not in his opinion in accordance with the contract. In addition to this and independent of the contract the work must by law comply with statutory requirements and difficult questions can arise in the event of conflict.

The purpose of extension of time provisions and the necessary elements for well drafted clauses.

2005-07-06T01:04:00.000Z

Because of the high risk nature of construction projects delay is a common feature and therefore an adequate provision in the contract is necessary. A provision for an extension of time is beneficial to both parties. An extension of time provision is an effective means for allocating risk, for a foreseen delay event, to either the contractor or the employer and can specify if neutral events of which only time will be given without costs.

From the employers perspective damages for late completion by the contractor will normally be liquidated and to preserve the right to these damages there must be an effective mechanism in the contract to extend the date of completion for a delay event caused by the employer. By extending the time of completion the contractors obligation to complete within a defined time is maintained. From the contractors perspective an extension of time will effectively provide relief from his strict duty to complete on time in respect of delays caused by designated neutral events.

For an extension of time clause to operate effectively the following will be necessary:
1. Clear definition of the meaning of delay in the context of the clause
2. A provision to allocate risk by clearly defining what events are the employers risk, what events will be the contractors risk and what events will be neutral events.
3. Allow for adequate mitigation of delays and as a preventative measure the clause will make provision for adequate and timely notice of delay events and/or likely delay events.
4. A provision of a means of assessment of the delay and how the new completion date will be determined.

In addition to the above there will be much to gain by dealing with the some common areas of potential dispute as follows:
1. Programme ? The contractor should submit a programme that details the manner and sequence in which a contractor plans to carry out the work and identifying where the critical path lies.
2. Purpose of the clause ? There should be a detailed description of what both parties aim to achieve by the clause.
3. Entitlement to extension of time ? The clause should deal with the situations and risks that will entitle the contractor to extension of time and whish party will be liable for loss and expense of the contractor.
4. Procedure for granting extension of time ? The clause should prescribe the primary methodology of calculating the amount of extension of time due.
5. Float ? The clause should deal with ownership of float and any effect it would have in relation to time and compensation.
6. Concurrent Delay ? The clause should deal with the effect of the possibility of concurrent delay on entitlement to extension of time and compensation if the contractor incurs additional costs that are caused by the employer and contractor.
7. Mitigation ? The clause should detail the extent of the contractors duty to mitigate.
8. Variations ? The clause should pre-agree the an allowance for variations and the effect on extension of time.
9. Basis of calculation of compensation for prolongation ? The contractor should deal with the method of calculating compensation for prolongation.
10. Global Claims ? The clause should deal with the extent that global claims will or will not be acceptable.

In conclusion there is much to gain from both parties being conscious of the purpose of the extension of time clause and making provision for common situations that are likely to occur. For starters by clearly defining responsibility of risks it will allow them to be priced into the equation and focus the mind on the risks that can to be managed. If or when a delay occurs it will prevent or ease disputes allowing more energy to be expended on overcoming the issue.

Implications of drafting construction contracts with performance criteria

2005-07-04T12:10:00.000Z

In traditional construction contracting there has been a rigid distinction between design and construction, with design being the task of the engineer or architect and taken to be excluded from the contractors function.

There is no precise meaning pf design in building contracts but generally it encompasses the planning of the form of the finished product. The ICE conditions draws a distinction between design of permanent and temporary works, the latter normally being the responsibility of the contractor. Under the JCT forms temporary works are entirely the responsibility of the contractor, unless otherwise provided for.

In respect of the permanent works it is just about impossible to lay down every detail of the design and therefore there is always an element of design undertaken by the contractor. In addition to a term of good workmanship there will generally be an implied term that the work and materials will be reasonably fit for their purpose, to the extent that they are not fully specified. The Contractor should thus be responsible for elements of the design left to him as held in Young & Marten v McManus Childs.

This principal may be limited by the form of the contract. Both the ICE and JCT forms entitle the contractor expressly to be given instructions necessary to complete the works. The ICE conditions require any responsibility for permanent work design to be expressly stated. Under the JCT form the contractors obligation is limited to the work shown in the drawings & bills. Thus in Mowlem v BICC the bills stipulated waterproof concrete, leaving the means of achieving the result unspecified and unpriced. This was held insufficient to make the contractor responsible when the concrete leaked.

Where it is intended to make the contractor fully responsible for performance the standard forms will be required to be substantially amended. It will be needed to made clear that the requirement will not merely be for provision of the design but for the adequacy. In principle this responsibility should be on the basis of fitness for purpose which can be achieved by incorporating the performance requirements into the contract. In some contracts obligations of the designer will be limited to the reasonable skill and care of the designer which will create difficulty where the liability is intended to be for the performance.

In the absence of express clear provision the courts have resolved doubts in favour of the building owner where it was clear that the design had been carried out by the contractor. For this reason forms of contract are often drafted to suit the degree of design liability undertaken by the contractor. For example if the employer wishes to specify the overall design with the contractor being responsible for the details, then the contract will need to contain performance requirements only for the elements that the contractor is to design, and these can be accommodated under a relatively conventional construction contract. Conversely if the contractor is to undertake the conceptual design as well as the details then there needs to be a carefully drafted list of employer requirements, which may go beyond mere technical performance. Further the contractor will need to incorporate details that he submitted as his tender proposal.

Consideration will also need to be given to the submission of details for approval as the work proceeds and as to what is to happen if the employer is not satisfied or changes his mind. The Contractor may not like this idea resisting any interference in the designs on the grounds of costs and delays. However from the employers perspective if there is no provision in the contract for an approval regime he will be in a contractually weak position when it comes to enforcing changes. In most large infrastructure projects this has the potential to cause major problems as the bulk of the design takes place after the contract award and performance specification alone is not always sufficient to adequately define the quality of the end product.

Determining the cause and effect of delay on construction projects

2005-07-01T12:26:00.000Z

Because construction projects often involve dynamic interaction between multiple parties the programme is often reliant on factors outside the control of the contractor. Many of the standard forms do not deal with the intricacies involved in interpreting responsibilities for the cause of delay and there is also conflicting case law which adds to the difficulty of determining the cause and effect of delay on construction projects.

There are however some matters that can be address in the pre-contract stage and negotiated in order to improve on the way delay issues are dealt with. Some are as follows:

Programme ? On construction projects the programme could consist of a mere start date and completion date while or on the opposite extreme could consist of high level detail that in reality will not happen. The important features of the programme to bear in mind are the manner and sequence the work will be carried out by the contractor that identifies where the critical path lie.

Concurrent Delay ? Often a situation will arise when multiple delays occur over the same period and responsibility lying with the Employer and Contractor. The three likely situations could be an Employer delay event occurs which causes the Contractor delay and while in delay an Contractor delay event occurs or visa versa. The third situation is when an Employer delay event occurs at the same time as a Contractor delay event. Some questions then arise as to who is responsible for what, how is the effect is apportioned between the parties and how is loss measured.

Float ? If there is float in a programme questions often arise as to the ownership of the float. For example if delay occurs which uses up the float how is the contractor compensated. If these questions can be answered in the pre-contract stages it can prevent a dispute once the parties have entered into contract.

Essentially construction projects are unique creatures of a one-off type nature often involving new technology that has not been proven with multiple party interfaces. Because of these factors and many others standard form contracts are often not adequate as an umbrella document that anticipates all possible events. The parties entering into contract need to carefully consider the requirements and constraints of the particular project and ensure that, as far as possible, provision is made for all eventualities and requirements.

Liability of Construction Professionals for Misstatement

2005-06-30T11:38:00.000Z

In the law of negligence liability for statements has developed separately from the liability for acts or omissions. The main case is Hedley Byrne v Heller, which involved a bank providing a reference for a customer to a company who they proposed to do business. Although the reference was favourable is was issued ?without responsibility?. The customer ended up doing business with the company but the deal turned sour when the customer went insolvent. The company sued the bank in negligence. The House of Lords held that the bank owed a duty of care and would have been liable, but were protected by the express disclaimer of responsibility. In the judgement the House considered the circumstances in which liability might arise for statements.

?Wherever there is a relationship equivalent to a contract, there is a duty of care. Such relationship may be either general or particular. Examples of a general relationship are those of solicitor and client and of banker and customer?.Where, as in the present case, what is relied on is a particular relationship ad hoc, it will be necessary to examine the particular facts to see whether there is an express or implied undertaking of responsibility.?

Thus engineers, architects, quantity surveyors and other professionals must act with caution when making statements to their clients, even concerning matters in which they are not directly appointed. This branch of law has developed further in Esso Petroleum v Mardon. In this case the defendant had taken out a lease of a garage based on a statement made by the plaintiffs of the throughput of petrol. The figures were based on a different design that had been refused planning permission. The question was whether the plaintiffs statement could be relied upon when they were followed by a contract. Lord Denning held that the defendant was entitled to succeed in his counterclaim. The Hedley Byrne principle of negligent misstatement has therefore survived the entrenchment period in the law of negligence and is now the only area where pure economic loss is recoverable under the tort of negligence.

Langton inc

2005-06-27T18:42:00.000Z

William Langton is a consultant at Langton Inc. who are contract consultants providing specialised commercial services. Although our roots are in the construction industry our services have evolved to incorporate the highly specialised requirements and skills demanded from the transportation and telecommunications industries.

We have extensive experience working with major national and international companies typically integrating with the in-house project team preparing claims, defending claims and providing legal advise.

We are a young enthusiastic company with the majority of our consultants qualified as quantity surveyors coupled with specialised legal skills. We have intentionally broken the mould of the traditional quantity surveying role and are constantly evolving with precise focus on our clients needs and requirements.