SOME NOTES BEFORE COMMENCING
- The attached paper was presented at a seminar of 27-4-2006 as part of the “Drafting Series: Engineering Contracts ”conducted by Current Law Journal
- Extensive updating has been effected to reflect extensive changes in the law (such as enactment of CIPAA in 2012) and use of new standard forms of construction contracts
- Numbers next to headings and sub-headings refer to items in the attached write up
- Conditions of Contract referred to for PAM are 2006 Form and IEM are the Second Edition
1. THE PROFESSIONS INVOLVED IN IMPLEMENTING BUILDING AND ENGINEERING CONTRACTS
1. The various professionals and their roles
- Land surveyor – land surveying and setting out
- Civil and structural engineer – earthworks, piling, sub and superstructure
- Architect – Bricklaying, Plastering, Painting, Glazing, Carpentry – but see below
- Mechanical and electrical (“M&E”) engineers – Plumbing, Sanitary fittings, Electrical wiring, electrical equipment and fitting, Fire fighting, Air-conditioning and ventilation, LPG, Lifts
- Interior designer – cabinets, built in furniture, etc
- Landscape designer – for landscaping
- Quantity surveyors for estimating the quantities and costs and managing of the contract
1.1 The key role of the Architect in the implementation and administration of building contracts
- Act as the agent of the Employer
- Ensure that intention of Employer is reflected in the design and during execution of works
- Concerned with aesthetics and functionality, compliance with statutory requirements
- Architect has to issue the Certificate of Completion and Compliance which confirms:
- Compliance with requirements of local authorities
- Receipt by him of all certified Borang G1 to G21 set out in Uniform Building Bylaws
- That the building complies with the requirements of the Street, Drainage and Building Act 1974
- That building has been built in accordance with approved plans
- As the Architect is designated to play the role of the contract administrator under the PAM Form, he plays a central role in the administration of building construction jobs
1.2 Engineers
Civil Engineer (“CE”)
- The CE plays an important role subordinated to the Architect
- The CE has to design the structural elements to the layout and functionality set by the Architect
- He also has to accommodate the M&E elements such as for example support for M&E services and allow openings
- Amongst the works for which he will be liable at law are the earthworks, foundation, structural works, and external reticulation
M&E Engineer (“ME-E”)
- The ME-E plays an important role subordinated to the Architect
- The ME-E has to design the M&E elements to the layout and functionality set by the Architect, and structural details as designed by the CE
- Amongst the works for which he will be liable at law are the plumbing, ACMV, electrical works, firefighting, and vertical transportation
Both Engineers
- Whilst only the Architect will sign Borang F (CCC), they will both require to sign off the respective Borang G together with the contractor or respective sub-contractor
- Note that Borang G21 is to be signed by a landscape architect
1.3 Quantity Surveyor
- Again the role of the QS is subordinate to that of the Architect
- His role is to prepare the budget for the project, evaluate tenders, vet and certify progress claims (with architect playing role to check), agreeing final accounts with the contractor
- He also checks and recommends rates for variations and claims for additional payments
2. ROLE OF ARCHITECT/ENGINEER
2.1 Architect/Engineer plays following roles:
- As the agent of the owner so as to ensure that the owner’s intentions are put into effect by ensuring that the design, materials, and workmanship as specified are reflected in the works
- Decide on applications and claims by the Contractor which can adversely affect the interests of the owner which is of a quasi-judicial nature
- Therefore both PAM and IEM Forms provide for reference by either party to arbitration
2.1.1 It follows from pg 6 and 7 that the Architect/Engineer plays the following particular roles:
- As a certifier – the architect will be liable if:
- he certifies defective work to be otherwise
- if he over certifies a progress payment
- over certifies the final account
- fails to require rectification of defective works
2.1.1 Supply construction drawings
- In event of failure to supply details in timely manner – the contractor will be entitled to an EOT and to claim additional expenses
- The losses suffered by the owner such as those resulting from the contractor’s claims because of delay, loss of rental, and additional financing charges would be recoverable from the A/E
- No right of recovery against A/E if delay is a result of a requirement of owner, such as to amend the design
3. PECULIARITIES OF CONSTRUCTION CONTRACTS
Unique to construction contracts
Due to duration of planning and execution of construction contracts and physical extensiveness of works:
- Owner’s entitlement to enlarge time for completion and time-based liquidated damages
- Owner’s entitlement to vary the works subject to the contractor’s right to payment with mechanism for the exercise of this right
Other features of construction contracts include:
- Extensive insurance provisions
- Provision of security
- Exhaustive specifications
- Rights of termination specifically provided in addition to depending on common law rights – both employer and contractor have this right
- Rights of suspension
- Provision of payment to be made on a progressive as against on a “one time” basis
The above are to cater for following aspects of construction contracts:
- Long delivery period
- Typically allow construction periods of 18 to 30 months. A lot of things can happen during the period.
- Because of this a contractor needs to be paid regularly and not wait for 18 to 36 months
- Goes into great details – for example there can be a lot of architectural features
- Cover extensive area or construction deep into the ground – because of this all underground details would be unknown before award
- Special technology requirements – good coordination between designer and contractor and between main-con and specialist sub-cons required
4. STANDARD FEATURES OF CONSTRUCTION CONTRACTS EXAMINED IN DETAIL
Details of special features of construction contracts
To ensure that parties’ rights are safeguarded construction contracts have standard features:
4.1 Power to instruct variations
- In other contracts, only a few details are needed, eg in sale and purchase of land:
- price
- the identity of the property
- the payment terms
- right to rescind in the event of failure to conclude the sale
- if parties wish to change payment terms, both parties will sign supplemental agreement to the effect
In the case of construction contracts
- Invariably, the owner would want to make changes while the works are going on
- Example over the long course of a construction contract, computer chip making technology improves, need to incorporate
- Variations can include changes to the quality, quantity, or sequencing or timing of the works. Can also include demolition or removal of completed works
- All major standard forms of contracts require variations to be instructed by the A/E and all instructions to be in writing
4.1.2 Valuation of variations
IEM Form provides at Clause 52 that rates:
- in the contract shall be applicable; or
- if the contract does not include applicable rates, the rates in the BQ shall form a basis or guide for deriving varied rates; or
- the Engineer is to fix rates which are “appropriate, fair, and reasonable”;
- Variations to be valued on daywork basis – this is to be stated in the instruction for the variation
The PAM Form additionally allows valuation on a cost plus 15% basis which is to include use of temporary facilities, site establishment as well as profit
4.2.1 Power to extend time for completion
- Time for fulfillment of obligations for most non-construction contracts is an essential term and failure will discharge the victim, i.e. time is of the essence
- Due to complicated nature of construction contracts (see slide 12), construction contracts include mechanism to extend time
- If no provision is made to extend time, due to S 47 of the Contracts Act 1950, the contractor is required to complete in a reasonable time
4.2.2 Common grounds for extension of time (“EOT”) –
below follow PAM Form 23.8:
- Force majeure – this would include occurrences such as a war, sinking of a ship
- Exceptionally inclement weather. 5% percentile highest rainfall for period concerned is accepted norm – (b)
- Occurrence to the Works of risk covered by insurance. Thus occurrence of storm, fire, explosion, damage caused by aircraft, and flood would entitle the contractor to an extension – (c)
- Civil commotion, strikes, or lockouts which may affect the progress of the works – (d)
- Civil commotion, strikes, or lockouts – strike by sub-con’s workers due to non-payment by main-con arguably does not qualify (e)
- Delay in giving possession to the Site or a part of the Site – (f)
- An instruction issued in respect to – discrepancy within Contract Documents, variations, postponement or suspension of any work – (g)
- Delay by Nominated Sub-Contractors for reasons which would entitle the Contractor to EOT, e.g. weather, late instruction – (h)
- Re-nomination of Nominated Sub-Contractor who has been terminated with the permission of the Architect – (i)
- An act of prevention or breach of contract by the Employer – to prevent time becoming at large if the Employer causes a delay of a nature not contemplated – (m)
4.2.3 Notice of delay and application for extension of time
- Standard forms of contracts stipulate timeframes within which notices of delays are to be served, failure to comply is fatal to contractor’s entitlement to time
- Of especial prominence in this context is the provision of Clause 23.1(a) of PAM Form where service of notice within 28 days is a condition precedent to EOT entitlement
4.4 Performance security
- Necessary to cover situations:
- Failure of the works requiring extensive rectification
- Major breach by contractor necessitating termination by employer and engagement of new contractor at substantial additional cost
- Particulars of bases of liquidation:
- On demand bond usually includes provisions:
- determined by you in your sole absolute judgment and discretion,
- On demand bond usually includes provisions:
4.4.1 Grounds to resist liquidation of bond:
- Fraud by beneficiary – example would be takeover of contractor company by employer followed by call
- Unconscionability – situation is of “such degree such as to prick the conscience of a reasonable and sensible man” – example in Singapore case of Gammon Pte Ltd v JBE Properties Pte Ltd because it was clear to the court that figure of the claim was inflated, the court ruled that the decision on liquidation would be deferred until rectification works were completed
4.6 Insurances
The fundamentals
- Essential in construction contracts because payment is made before end product is ready
- A contract of insurance is subject to “utmost good faith”. So all peculiarities of project site such as poor ground condition, hazardous details of construction will need to be declared
- The insurer possesses the right of subrogation, i.e. he can step into shoes of incurred party after compensating loss. As such the contractor needs to be made an insured party if the purpose of insurance is to be achieved – prevents insurer from stepping into shoes of employer and claiming against the contractor
4.6.1 Damage to the Works, damage to 3rd Parties
Construction All Risks insurance excludes:
- Any failed works due to a defect is not covered but damage consequent to failure is covered – thus a failed column is not compensated but collapsed adjacent columns and beams due to loss of support are compensated
- Economic loss – if generator for works is already commissioned but is damaged, replacement is replaceable but not cost of one hired in the meantime
- Willful acts – damage to existing cable caused being aware of its presence is not compensable
- An employer can cover against economic loss due to circumstances beyond his control by means of advance loss of profit insurance
4.7 Some provisions on payments are highlighted:
- Both PAM and IEM Forms stipulate certification of payment within 21 days of Contractor’s submission of progress claim (Cl 30.1 & 58.2 respectively)
- Both PAM and IEM Forms allow Contractor to suspend works if payment not made w/in period for honouring and Employer fails to pay 14 days after notification by Contractor
- Termination for non-payment may be effected if payment is delayed and Employer fails to pay w/in 14 Ds after notification – note that notice to terminate must be served w/in timeframes of 10 Ds and 7Ds under PAM and IEM Forms respectively, otherwise a fresh notice must be served
4.8 Termination generally
- In all standard contracts, in the event of occurrence of bankruptcy the other party can effect immediate termination
- Right to terminate under the contract does not preclude right to terminate at law
- Termination under the terms of a contract carries with it rights as spelt out, for example:
- If termination is effected by the employer, the employer is entitled to require the contractor to leave behind temporary works, plant, and machineries for use by a 3rd party engaged by the employer – under both PAM and IEM Forms
- Termination by contractor – the PAM Form states that the contractor is entitled to not only payment for works but also losses and/or expenses