Contracting, a risky business!

Chris Binnington, Managing Director of Binnington Copeland & Associates, presents the first of a series of articles relating to contractual law.

Chris is an acknowledged expert in the fields of alternative dispute resolution, FIDIC forms of contract and in the preparation and analysis of contractual claims.

He has lectured contract law to over 8 000 delegates from the construction industry over the past 15 years and has been extensively involved in the drafting of concession contracts in the water treatment, power generation and roads fields. He has lectured on private funding initiatives and BOT/BOOT contractual arrangements, and appeared as an expert witness in England’s High Court and in South Africa where he has also handled arbitrations in some twelve matters.

It is said that great reward cannot come without great risk. Nowhere is this a greater truism than in the construction industry. In fact the risks to which contractors are exposed make it difficult to understand why anyone would want to become a contractor!

Don’t rely on insurance

The fact that a number of such risks can be covered by insurance does not lessen the potential exposure of the contractor to the risks in the first place. Contractors see to forget, or more probably never understood that insurance does NOT shift liability. The fact that someone may have covered the risk will not reduce the contractor’s liability where the insurer repudiates the claim or the claim is met but there is no waiver of subrogation. This apart from the liability for deductibles.

Write the right contract

The transfer of risk from employer to contractor is, of course, very easily achieved by way of the specific contract documentation. All risks which are not stated to be the employer’s risks are risks which the contractor will have to bear unless the contractor can escape the risk through a common law right where the risk is not expressly stated as being the employer’s. For example whilst most standard contracts will provide an escape for force majeure type situations (which are themselves contract specific), the contractor will be excused from performance where a true situation of supervening impossibility arises. The legal test is an objective one. Mere difficulty of performance does not amount to impossibility and the fact that it may be harder, more difficult, more expensive or more onerous to fulfil the contractor’s obligations will not mean that it is impossible to do so. Where the impossibility is merely relative the obligations will not be terminated and the party who is unable to perform will be in breach. Different con tracts allocate risk in different ways and it is the contractor’s responsibility at the time of tender to identify which of those risks are acceptable and which are not.

All too often contractors adopt the two “Ps’ approach, Price and Prayer. They Price for those risks which can be anticipated and Pray that those which can’t do not materialise. This strategy is also dangerous for the employer since usually there is no duty on the contractor to disclose the contingencies allowed in the tender. Nowhere is this more apparent than in design and build, lump sum, situations, Even where contingencies are allowed they may be inadequate for the actual risk. The result is that instead of relieving itself of risk the employer may well be assuming the worst case risk scenario, a failed contractor driven into liquidation by the very risks the employer was so keen to off load onto the contractor

Foul!

Often contractors are heard to complain that the conditions of contract are “un fair”. Usually these complaints surface after the contract has been awarded and the contractor first becomes aware of the significance of the relevant clause or clauses. Unfortunately this is too late, Contractors should heed the judgement of Jessel MR as long ago as 1903, when his lordship stated:

“Our law does not recognise the right of a court to release a contracting party from the consequences of an agreement duly entered into by him because that agreement appears unreasonable,” (Burger v South African Railways 1 903 TS 571)

The time to deal with unfair terms is at the time of tender and not after the contract has been awarded. One of the essential elements of a valid contract is ‘Consensus”. Without agreement there can be no contract (in broad terms). Thus if the terms of the contract are so unfair, walk away from them.

The management of risk should rank as one of the contractors highest priorities. Too few contractors manage risk properly. To do this effectively one must first Identify the potential risks, Plan the reaction to the risk and Implement the action if the risk materialises. This necessitates the allocation of resources and resources attract a cost which Is usually not recoverable if it has not originally been allowed for in the pricing structure.

One of the most potentially damaging risks for contractors is the risk associated with disruption. All the major claims with which we have been associated over the past 20 years have contained major elements of disruption.

One of the most disastrous, although certainly not the biggest, was a piping sub contract where the sub contractor went to site to carry out R22-million of work, ended up being paid R42-million and in order to earn this sum expended R140-million. Had that sub con tractor followed the advice in the previous paragraph, to Identify, Plan and Implement, coupled with the other three main requirements for managing a disruption situation, RECORDS, RECORDS, RECORDS, its final account could well have shown a profit!

Yes, contracting is a risky business and at the end of the day the successful con tractors are those that regularly manage the risk effectively, It is trite to restate that from an employer’s perspective a successful contract is one that comes in on time, within budget and with the anticipated quality. Such employer’s objectives will only be consistently achieved by contracting with successful contractors and that, in turn, means recognising the right to earn a profit!

THE CIVIL ENGINEERING CONTRACTOR FEBRUARY 2005