Our Nation’s Public Works Contracts Must Evolve
Runaway costs and over-runs are still a huge problem, according to John FFF O'Brien
RESOLVING A DISPUTED PUBLIC WORKS FINAL ACCOUNT, with the assistance of a neutral third party, is as much a part of the construction process today as the physical setting out of the works. However, this is simply not the way it ought to be — and it’s high time it was fixed.
We have an overwhelming obligation and responsibility to the generations to come not only as a nation, but as an EU member state, to address the reasons for such uncertainty in our public works contracts. This is particularly urgent if Ireland is to build and maintain her infrastructure into the future.
The Perfect Storm
June 8 2010 was the date that the Arbitration Act became law in this country. This occurrence was the last in a series of three unfortunate events that adversely affected the construction industry, which gave rise to what I respectfully refer to as the ‘Perfect Storm’. The two other events were the introduction of the new form of Public Works Contract (PWC) in
2007 and the 2008 global financial crisis. The perfect storm created by those events has continued to blow fiercely for more than a decade.
Begin Again: the Introduction of the PWC
Before identifying how we solve the problem, we need to understand it, and for that, we have to consider its origins.
In 2007, the first versions of the PWC were introduced to replace the GDLA Blue & Yellow forms of contract (for use on Employer designed building works) and the IEI form of contract (for use on Employer designed civil engineering works). These new contract forms were developed as a reaction to a ‘politician’s brief’, and were purportedly to achieve out-turn cost certainty, as a disgruntled electorate were seemingly fed up with cost over- runs on government contracts.
However, what many politicians didn’t understand (and indeed many mainstream journalists too) is that construction contracts are all about risk allocation and that, in order to achieve commercial value for taxpayers’ money, the risk ought to remain with the party who is best placed to manage it, and, critically, when you mismanage this allocation it can get quite complicated and quite expensive!
In theory, the objective of the new PWCs was to procure tenders from Contractors that would become pure ‘fixed price lump sum’ contracts, thereby giving cost certainty. There would be no more undefined or provisional works in these new contracts nor would there be any contingency slush funds — contractors would simply be paid one pre-agreed price for one pre- defined package of work. Of course, it was expected that the lump sums tendered under the new regime would be slightly higher than those that would have been tendered under the previous government contract forms, but now, in theory, there would be no chance of any ‘runaway’ costs over that tendered lump sum.
Consultant design engineers and architects did not escape the new regime either, as their brief was to comprehensively define and design the Works as required by the Employer’s brief, so that there would be little or no extras whatsoever. This is not an easy task to achieve, and perhaps that is why every international standard construction form of contract has a variation clause that does not vitiate the contract.
Even projects for historical public building refurbishment works, which were traditionally tendered and contracted on a provisional basis with a schedule of rates, incorporated a new PWC ‘heritage strategy’ that required an investigative works contract to be carried out in advance. This was to uncover and record what lay beneath the rotting fabric of a building so that the architect could ‘comprehensively’ complete his or her design.
This scope was then tendered and contracted on a fixed price lump-sum basis. That process, although looking good on paper, has in my experience not worked out too well either, and even the recent part refurbishment of Leinster House needed a ‘special iteration’ to the standard PWC which I’m sure helped bring that project in on time and on budget without risking any embarrassment of an out-turn cost overrun.
Indeed, this new PWC ‘comprehensively defined and designed fixed price lump sum’ regime, sounded great in theory to those politicians and journalists who really didn’t understand the commercial mechanics of our construction industry. However, lurking beneath the veil of these newly launched PWCs were some very real problems indeed.
A Precedent for Problems
The first element that contributed to the perfect storm was that these new PWC contracts had never been used in any jurisdiction anywhere in the world, and were simply unleashed upon the Irish public works sector completely unproven.
At least the GDLA 1982 used as its foundation the RIAI 1980, which was itself based upon the terminology used in UK equivalent standard forms of building contracts, meaning that the Irish clauses, although not identical to the UK, shared a commonality of interpretation. The Irish IEI civil engineering form of contract was in fact almost identical to the UK ICE form, and shared commonality of clauses.
But by far the most important aspects of the old Irish public works contracts was that both employers and contractors alike could rely upon the UK’s persuasive case precedent for the judicial interpretation of the contract clauses, thereby giving certainty to risk allocation to the parties under the contract.
The issue with introducing an entirely new contract in the form of the 2007 PWCs, was that there was simply no precedent from which the parties could derive any interpretive certainty. Due to the compounding of problems that I address in this article, that unfortunate position remains to this day.
Global Problems, Local Problems
To compound matters even further, the 2008 global financial crisis became the second element in the making of this perfect storm, in which the Irish construction industry effectively collapsed just as its infant new Public Works Contracts were being put to use.
During those bleak years of recession, many contractors tried their very best to stay afloat, some going abroad to work in different jurisdictions. Others stayed home and picked up whatever scraps they could on public maintenance works under the new PWC forms.
During this period, the tendered lump sums on the PWCs did not increase as they ought to have done. This was mostly due to the recession, but also partly because many contractors tendered lump sums still unsure of the ramifications resulting from the new powers, duties, and responsibilities being allocated to each party under the new forms.
Contractors were not alone in this regard, ER’s and employers were also unsure of the workings of the new PWCs and there was a sense of “keep the heads down and keep working”, and any skirmishes (for example over a 10.3 or the application of a T1 or T2 threshold contingency) never really went anywhere. In the early days of the recession, nobody really went to dispute.
In fact, one might be forgiven for believing that after the first five years, the new PWCs were a success and working just fine.
Effectively, the 2008 crisis resulted in the stunting of any productive assessment of how the PWC performed in practice and whether it actually worked or not. This was because no one had really used it or tested it. We were all just simply trying to survive, and contracts don’t mean a whole lot in those circumstances.
Under the new PWC1, disputes were to be resolved ‘in the usual way’, by step-down conciliation, and then if not resolved, to be finally determined in domestic arbitration under the Arbitration Act 1954.
The 1954 Act had a case-stated procedure under Section 35, which was a useful tool at the disposal of an Arbitrator who could, if he decided that there was insufficient legal authority available on an issue at large during a reference, seek leave of the High Court to have the High Court to answer a legal question or questions on the matter.
One would have thought that this case-stated procedure contained in the 1954 Act would have been very useful indeed for building up a library of judicial interpretation of the individual clauses in the PWCs, but alas that wasn’t to be.
On the June 8, 2010, the new Arbitration Act came into force in Ireland, abolishing the case-stated procedure.
This was the third element — the perfect storm was now complete and the new PWC ship had no rudder, and no harbour in sight.
The decision to abolish the case stated procedure in the 2010 Arbitration Act may have been made with the intention of strengthening the protection of arbitral tribunal decisions from court interference, in order to make Ireland a more attractive neutral country as the seat of international arbitrations.
But the drafters of the 2010 Act perhaps did not appreciate that the country’s construction industry had only three years previously been encumbered with a brand new suite of public works contracts, where there was no authority whatsoever to assist in the interpretation of the clauses therein. So, in 2010, not only was there no persuasive case precedent from other jurisdictions available to assist in PWC clause interpretation, but the only portal to create our own case precedent had just been sealed shut by the 2010 Act!
It has remained that way now, for over a decade.
Increase in Works, Increase in Disputes
As the economy began to recover from the 2008 crash, the volume of public works began to increase again, and with that the volume of disputes. Interim determinations by Employers’ Representatives gave rise to disputes, and disputes became more frequent as users each formed a view on how the various PWC clauses and schedules could be interpreted.
There is no formal public record, redacted or otherwise, which logs the outcome of what must be, at this stage, hundreds if not thousands of disputes between public sector employers and contractors over the past decade.
What our industry does have, is a trail of revisions to the various PWCs where one might suspect, that the outcome of some of these confidential disputes have warranted a unilateral change here or an edit there. Indeed, taken together, these amendments to the PWCs do form a sort of precedent, albeit not a very judicial nor indeed an objective one.
One such unilateral revision was slipped into the Tender & Schedule in FTS v1.4 on the 28 July 2011. It is one which effectively stipulates that each party pays their own costs in arbitration, even if they win, and even if the Contractor beats an Employer’s sealed or Calderbank offer, he still pays his own costs! Such a provision became possible when Section 21 of the
Arbitration Act 2010 removed the prohibition on contract terms making parties liable for their own costs in any event. The idea behind this removal
is understood to have been to facilitate US parties to arbitrate their disputes in Ireland, but the effect on Irish disputants seems to have been missed in the process.
This is widely considered to be a highly inappropriate and inequitable term to be included in a government drafted public works contract. Furthermore, it is a term which contrasts starkly with the rules of the Irish Superior Courts where ‘costs following the event’ — which is also the default position in most other common law systems.
This grossly unfair provision has been unilaterally forced upon all public works contractors, who now have no way of recovering their legal and expert costs even when they succeed in defeating a public employer in arbitration.
Because of this grossly unfair term, many contractors simply cannot afford to take a risk, of getting a favourable award in arbitration, as their legal and expert costs will be offset against his recovery and will most likely dilute if not drown out the quantum of the substantive award.
This provision also completely destroys the Calderbank sealed offer procedure that is crucial to trigger parties into properly assessing and reassessing their risk exposure to costs and settlement expectation during the Arbitration referral.
The most experienced practitioners will be only too aware that many arbitrations do not go all the way to final award, but rather are settled in a parallel confidential mediation process because a party’s live risk profile changes during the pleading, discovery and plenary processes of arbitration.
As is well understood, the award of, and liability for costs, are an intrinsic part of the dispute resolution process in construction. That crucial element was unilaterally stripped away, making arbitration somewhat of an impotent procedure from the contractor’s perspective.
Ireland as a member state in the EU, and of the common market for EU tendering of public works projects above €5m, cannot allow inappropriate and inequitable provisions remain in its Public Works Contracts that effectively deprive public works contractors access to due process.
Where are we now?
This paper opened with the words:
Resolving a disputed public works final account with the assistance of a third party neutral is now as much a part of the construction process today as the physical setting out of the Works. However, this is simply not the way it ought to be, and it’s high time that it is fixed.
What I have found, is that public employers and their representatives make interpretations and determinations on PWC 10.3 claims based upon a ‘rehearsed party line’ of what a particular clause was intended to mean by the drafters, rather than forming an independent and objective view themselves of what it actually means.
Often, a weaker or less learned participant of a PWC does not consider the merits of how a clause or provision may have (or could have) been interpreted at the time of tender. One often surmises that the participant is perhaps following a circular of orders that instructs the only internal interpretation allowable. This is often what triggers a contractual dispute on the PWCs, which is then referred to a third party neutral for assistance.
In my experience, this is where the entire process starts to heave under its own dead weight.
The responsibility of a third party neutral to a dispute cannot be understated and is of paramount importance to the entire construction industry. There are exceptional practitioners who fully understand this responsibility and can provide that highly valued neutrality and objectivity with competence and conviction — traits that are particularly required by conciliators, adjudicators, mediators and arbitrators alike.
Unfortunately, there are others that have been drawn to the field of ADR as third party neutrals, but they2 suffer from an unconscious bias, never fully shaking off their previous careers and, without the benefit of judicial case precedent direction, they are being retained and appointed because of their own consistent and unchanging interpretations of the PWCs.
This is simply not acceptable anymore and after a decade of PWC uncertainty, we as an industry, have a responsibility to fix this problem now.
So What is the Solution?
1. Amend the Arbitration Act 2010 and reinstate the case stated procedure. That way we can build up a case precedent of judicial interpretation of PWC clauses the way that it ought to be in a common law jurisdiction like Ireland. This will provide certainty and also assist the third party neutral in making robust decisions.
2. Remove the term in the PWCs that parties pay their own costs in arbitration and revert to costs following the event, as per the rules of the superior courts. Also, remove the amendments that adversely affect the traditional Calderbank procedure.
3 February 2021
1 Long before the option to refer a construction payment dispute to statutory adjudication under the Construction Act 2013
2 Contractors, Employers, Lawyers, Public Servants & Construction professionals alike