MISCONCEPTIONS OF THE CONTRACT

article 58: Misconceptions of the Contract

 

One of the questions which always produces mixed answers when raised at our seminars is whether or not the programme constitutes a contractual document. A lot of people assume that once the programme is approved or accepted by the Principal Agent then it becomes binding upon the parties to the contract. This is however incorrect! Whilst it is possible to incorporate, usually by way of the acceptance of a tender which includes a programme, the programme as a contract document, not only is this not contemplated by all of the standard forms of contract, but it is extremely unwise. A simple perusal of the clauses governing the programme in all of the CIDB approved standard forms will illustrate that, without exception, these contracts contemplate that a programme will be brought into existence after the award of the contract. Whilst it may well be the case that employers require information in regard to programming issues at the time of tender and may well request a tender programme to be submitted together with the tenders, employers would be well advised to make it clear that this information will be solely for information and will not be incorporated into the contract itself. The obligation to provide a programme is clearly a contractual obligation, see for example clause 12.2 of GCC 2004:

“The Contractor shall deliver to the Engineer within the time stated in the Contract Data, calculated from the Commencement Date, a realistic programme showing the order of procedure, the duration of activities making up the programme and method which he proposes to using carrying out the Works in order to meet the Due Completion Date.”

Obviously what is contemplated here is the generation of the programme by the contractor after the contract has been awarded and the submission thereof to the engineer for his approval. The engineer’s approval cannot change the commercial terms between the parties, employer and contractor. That this is so is self evident from the fact that in the event of the contractor showing planned completion earlier than the due completion date required as a contractual term, approval by the engineer cannot shift the due completion date to the planned completion date proposed in the programme by the contractor. This legal position was also emphasised in the Alfred McAlpine case in which the judge, when commenting on the purpose of a programme stated:

“The obvious purpose of such a programme is for the Employer and the Engineer to see that the Contractor intends to execute the work at a sufficient rate of speed to complete the contract within the allotted time shown in the programme”.

Programmes are only advisory tools. They are however the best method of graphically representing delays and are vital for contractors in establishing rights to extensions of time particularly where the causes of delay are complex and arise from several different sources. A programme in effect reflects the difference between the intent and the reality of the situation due to the delaying events.

Unfortunately the recognition of the status of a programme and the downside risks to both employer and contractor in making the programme a contract document, are not fully appreciated by our industry. A classic example of where the employer was seriously disadvantaged as a consequence of making a programme a contract document is illustrated, once again in a case involving Alfred McAlpine, this time in Yorkshire . The circumstances of this dispute arose out of the employer, Yorkshire Water Authority inviting tenders for the construction of a tunnel at Grimwith Reservoir. The contract was based upon the UK ICE Conditions of Contract, 5th Edition, which are very similar to our own GCC 1990 Edition, and clause 107 of the specification required the following:

“Programme of Work:

In addition to the requirements of clause 14 of the Conditions of Contractor, the Contractor shall supply with his tender a programme in critical path analysis form sufficiently detailed to show that he has taken notice of the following requirements and that the estimated rates of progress for each section of the Work are realistic in comparison with the labour and plant figures entered in the Schedule of Labour, Plant and Sub-Contractors”.

McAlpine submitted a tender on the standard ICE form on 1 December 1975 accompanied by a programme and method statement which were approved. On 27 February 1976 the tender was accepted by letter from the employer and a formal agreement was signed on 24 March 1976 incorporating the tender, the minutes of a meeting held on 18 December 1975 the programme and approved method statement and the employer’s letter of acceptance.

The method statement had followed the tender document in providing for the construction of the Works upstream. The contractor maintained in the event it was impossible to do so and after a delay the work proceeded downstream. The contractor contended that in the circumstances they were entitled to a variation order in terms of clause 51 (1) of the GCC. The dispute was referred to arbitration and the contractor appealed. (It should be noted that generally speaking there is no appeal from an Arbitrator’s award albeit it may be allowed by agreement between the parties).

It was held by the court:

(a) the method statement was not the programme submitted under clause 14;

(b) the incorporation of the method statement into the contract imposed on the contractor an obligation to follow it insofar as it was legally or physically possible to do so;

(c) the method statement therefore became the specified method of construction save if the variation which took place was necessary for completion of the Works because of impossibility within clause 13 (1). McAlpine were entitled to a variation order under clause 51 and payment under clause 51 (2) and 52.

Although this related to a method statement the point that I have highlighted above in regard to programmes is equally of application to method statements. Had the employer followed conventional wisdom and allowed the contractor to generate a programme and provide a method statement purely as advisory tools, as indeed is contemplated by our own standard forms of contract and also by the UK ICE 5th Edition, then it would have been the responsibility of the contractor to adjust its method of working to suit the conditions. McAlpine’s complaint was that there was too much water flowing downstream making it physically impossible to construct working upstream. It was however able to construct working downstream. The normal position is that it is the responsibility of the contractor to construct the Works using appropriate methods. McAlpine was successfully able to argue that because of the incorporation of the method statement into the contract its choice of methods was severely limited and it was prevented from working downstream notwithstanding that it could have achieved the desired result had it changed the method of working. Although the court case does not deal with the quantum of the variation which ultimately flowed from the court’s decision, there is no doubt that this situation must have cost the employer a significant sum of money as well as the cost of the arbitration and the litigation which it opposed and lost.

The moral of the story is that employers and contractors alike must recognise that certain documents are essential as far as their incorporation into the contract is concerned. Other documents and I have illustrated the programme and the method statement as being typical of those other documents, are advisory in nature and should never form part of the contract documentation. In the examples I have cited above the employer was disadvantaged but it is equally likely that in other situations the contractor could be disadvantaged by such an incorporation into the contract.

As I have said before, 90% of all disputes in the construction industry emanate from poor quality contract documentation alternatively a misunderstanding of the principles of contract law reflected in the contract documentation. Unfortunately tenders are frequently put together under extreme pressure and the focus of attention is on the pricing of the job to win the tender with commercial considerations taking a back seat. As long as this situation prevails contractors can expect to become involved in disputes caused by lack of attention to the commercial details.

Chris D Binnington Pr Eng
Managing Director
Binnington Copeland & Associates (Pty) Ltd.