Risk Allocation in Construction Contracts PDF

12 Risk allocation in construction contracts John Twyford* Editorial comment The most famous of the Laws of Edsel Murphy states ‘anything that can go wrong will’. Whether Murphy was a builder is not clear but his words must resonate wit...

12 Risk allocation in construction contracts John Twyford* Editorial comment The most famous of the Laws of Edsel Murphy states ‘anything that can go wrong will’. Whether Murphy was a builder is not clear but his words must resonate with many people in the construction industry. Building is a notoriously risky business and the consequences of unexpected contingencies arising can be financially devastating for many of those who are participants in the process. Risk management is now a recognized process in the industry, although there may be some doubt as to how widely any formalized procedure is applied by any particular sector of the industry. This chapter is not, however, about assessing risk or planning for risk, but about how risk is spread between the various parties engaged in building procurement. When something does go wrong in the course of design and construction work, and, if Murphy is to be believed, it is a matter of ‘when’ not ‘if’, then there are inevitably financial consequences. Depending on how the risk is allocated under the contract for the work one or more of the parties will have to pay for the extra work required to rectify the situation. Generally the only people to profit in these circumstances are the lawyers. Under a traditional tendered lump sum building contract, where a builder bids for the right to a job, and if successful, agrees to carry out the work for a fixed amount of money, a great deal of the risk associated with carrying on and completing the work is placed with the builder. It is this very approach, time-honoured though it may be, that is the root cause of much that troubles the industry; profit margins are low and unforeseen circumstances, often beyond the builder’s control, can lead to insolvency and enormous subsequent problems with half-finished projects, unpaid sub-contractors, and completion times and budgets blown out of all proportion. Different forms of procurement assign risk in different ways and can make the difference between having a successful project or a disaster. * University of Technology Sydney  Risk allocation in construction contracts 181 The relationship between the question of who carries the risk and the value of the finished building is about more than just the avoidance of any additional cost that may arise. There are also concerns with delayed completion (important if the client is looking to occupy the building or wishes to lease it, which might depend on completion by a certain date, e.g., to coincide with a major event such as the Olympic Games), a perception that the building has a troubled past which may colour the view of prospective tenants or buyers, and a lack of commitment to quality if the contractor has been forced to accept what she or he believes is an unfair financial burden arising from some risk that has become an actuality. While clients may seek to pass all risk to the contractor, and while that may be possible, the eventual costs may well outweigh the benefits. In this chapter the author discusses different contractual arrangements in the construction industry and how risk is allocated in the various forms, and looks at the consequences that may arise as a result of unbalanced or unfair allocation of risk amongst the parties. 12.1 Introduction The idea that contracts may be used as vehicles for risk allocation in commercial transactions is by no means new or confined to the construction industry. One highly respected writer on the law of contract pointed out (Atiyah, 1981, p. 208): In the end, therefore, other justifications must be sought for treating agreements or mutual promises as binding.... The place to start, it may be suggested, is the reason for the whole arrangement.... Why, in other words, do people make advance arrangements in the first place? The answer surely is that they want to eliminate (or shift) risks of various kinds. Contracts for future performance are often deliberately entered for the purpose of shifting risk.... This is a kind of speculation, a bet, but it is likely to have a more useful social or economic purpose than a simple bet. For risk allocation between businessmen may be designed to shift risks to those who are better able to evaluate and absorb the risks, or even prevent them. From what Professor Atiyah has said a number of questions arise. First, what is risk? Second, are there any issues of justice or commercial common sense arising from attempts by one contractual party to transfer risk to his or her contractual partner? Finally, to what extent has the law recognized or encouraged the transfer of risk between contractual parties? This chapter will attempt to answer those questions and conclude with a discussion of the manner in which a selection of standard forms of contract deal with some common risks in the construction process. 12.2 What is risk? The Australian and New Zealand Standard AS/NZS 4360:1995 defines risk as: ‘The chance of something happening that will have an impact upon objectives. It is measured in terms of consequences and likelihood.’ The British Standard somewhat more obscurely says: ‘A combination of the probability, or frequency, of occurrence of a defined hazard and the magnitude of the consequences of the occurrence.’ In terms of a construction 182 Design and Construction: Building in Value project this translates to a failure of a contractor, caused by random circumstances, to complete the project within the constraints of time, cost and quality contemplated by the original agreement. The construction industry is particularly susceptible to risk. This susceptibility arises from a number of reasons including the time taken to plan and execute the project, the large number of people needed to participate in the project (often from different cultures), inhospitable construction sites, specification of untried materials and the fact that construction projects are susceptible to risk cultivation by the contracting parties or those who advise them (Bunni, 1998, pp. 93–4). The matters mentioned in the previous paragraph are all matters that the parties to a construction contract are well aware of and are addressed in both ‘one-off’ contracts and the standard contracts available to the industry. Usually the eventuating of a risk will manifest itself in the need for the construction period to be extended and/or the need for the contractor to execute additional work. The economic questions that arise as a consequence of such incidents are: 䊉 should the construction period be extended because of a delay and if so, should the contractor be paid delay costs 䊉 if an extension of time is inappropriate, should the contractor be required to pay liquidated damages 䊉 where additional work is executed is this to be treated as a variation to the works or as part of the scope of the original works. In terms of the texts of standard contracts such matters are dealt with under the rubric of: 䊉 the consequences of disputes with the labour force resulting in strikes or lock-outs 䊉 the consequences of inclement weather 䊉 the need to execute work claimed not to be within the scope of the original transaction or to execute work arising from latent conditions. In addition to these risks there is the risk of loss or destruction of the works by fire, flood, natural disaster, or potential liability to third parties arising from activities on the construction site. Of all risks these are usually the most carefully and extensively dealt with in construction contracts. 12.3 Justice and commercial issues arising from transfer of risk It could be said that the outcome of a successful negotiation involves the other party to the contract taking all of the significant risk. This can result from the canny negotiation of one of the parties or, more likely, the result of one of the parties being in a dominant bargaining position. However, in terms of a final result, there would seem to be good reasons for avoiding a situation where a party undertakes a risk of which it is not aware. If the risk eventuates, the party who is prejudiced will usually defend its position by whatever legal means are available. Litigation is hardly a satisfactory outcome to a construction project; equally a dominant party forcing the risk onto a weaker party raises both economic and justice issues. As a consequence, certain so-called principles of risk allocation have evolved which are said to produce both just and economically efficient results.  Risk allocation in construction contracts 183 The principles of risk allocation with which the construction industry will be most familiar are those proposed by the Dublin lawyer, Max Abrahamson (The Abrahamson Principles, 1979). Those principles dictate that a party to a contract should bear a risk where: 䊉 the risk is within the party’s control 䊉 the party can transfer the risk, e.g., through insurance, and it is economically beneficial to deal with the risk in this fashion 䊉 the preponderant economic benefit of controlling the risk lies with the party in question 䊉 to place the risk upon the party in question is in the interests of efficiency, including planning, incentive and innovation 䊉 if the risk eventuates, the loss falls on that party in the first instance and it is not practicable, or there is no reason under the above principles, to cause expense and uncertainty by attempting to transfer the loss to another. These principles were adopted by a Joint Working Party comprising representatives of Government construction authorities (National Public Works Conference) and the construction industry (National Building and Construction Council) as a desirable model for use in the Australian industry (NPWC/NBCC, 1990). The definition of ‘risk’ adopted in the report is ‘hazard, exposure to mischance, or chance of bad consequences’. The adoption of the Abrahamson theory of risk allocation has not gone unchallenged in Australia. One commentator (Davenport, 1991, p. 21) points out that it:... is misconceived and should be abandoned. The main reasons are: the theory is not capable of practical application, risks are not capable of clear definition and ambiguity results, the theory involves the introduction into contract law of principles of economic theory and equity that have failed to gain acceptance in contract law generally. [The author then proceeds to suggest a more specific solution to the problem.] The recommended alternative approach is to identify possible events and with respect to each, specify whether the contractor is entitled to: an extension of time, reimbursement of extra costs, reasonable off-site overheads and profit [or no extra time or reimbursement at all]. The economic rationale and consequences of allocating risk on the basis of the Abrahamson principles, although not referred to as such, are explained by Bunni (1998, p. 103): As risks associated with foreseen and identifiable hazards are calculated, it should be generally a matter of policy to determine to whom each of the risks is allocated. The most cost-effective method of allocation from the point of view of controlling the occurrence of the risk and mitigating or eliminating its adverse effects is based on the ability to exercise such control. However, risks allocated to the contractor on the basis of this method would have a cost implication if they are not his own fault, since it would be prudent for the contractor to include in his original price an element relating to this additional risk he is asked to carry. If the risk does not eventuate, the employer would have paid a larger sum than necessary. On the other hand, this may be more advantageous to the employer (principal) than to assume the risk himself and be exposed to the possibility of having to make an additional 184 Design and Construction: Building in Value payment should the risk eventuate. This is particularly so where there are strict budget restrictions or where the financial considerations of the project are such that the project would not be economically viable beyond a certain limit. It is not necessary to canvass the efficacy or otherwise of the Abrahamson formula (or any other) as this chapter is concerned primarily with the legal machinery of risk transfer. The material has been included to form a background as to why risk transfer is of such importance to contracting parties. This discussion continues with an examination of a number of standard contracts. 12.4 Legal basis of shifting construction risks from one contractual party to another Generally the law allows the parties to a contract to make their own bargain. Accordingly, if the contract contains clear provisions doing so, then there is no legal objection to a party transferring the contractual risk to his or her contracting partner. This point is well illustrated by a decision of the New South Wales Court of Appeal in 1998. There the case concerned whether it was the consignor or the carrier that must bear the loss for the loss of cigarettes stolen from a container at a freight terminal. The consignor accepted that the contract between it and the carrier had the effect that consignor must bear all but an insignificant fraction of the loss. Accordingly, the consignor sued the owner of the freight terminal in negligence for failing to provide appropriate security services for the terminal. Mason P (in W.D. & H.O. Wills (Australia) Limited v. State Rail Authority of New South Wales (1998)) put the matter succinctly:... it is neither reasonable nor just in the circumstances of this case, to throw the costly burden of providing security services upon [the owners of the terminal] when they were no part of negotiated risk allocation between the parties that had primary responsibility for the safety of the shipment. There are, however, some caveats that a party drafting such a document must bear in mind. As mentioned above, the document must clearly state the intention in this regard. The Chief Justice of the Supreme Court of South Australia (Bray CJ in Taylor Woodrow International Ltd v. The Minister for Health (1978), p. 9) was scathing in his description of a botched attempt to do just this: I must say that the departure from traditional terminology in amending the well- known variation clause so as to include, not only an addition to the work, but a change in the time provisions is not only anomalous but deplorable. It is like tipping an entirely gratuitous truck load of manure into this already sufficiently muddied stream. Moreover, a failure by the parties to clearly state their intentions in this regard could bring into play the rules of legal interpretation. This will not always achieve the result the parties expected. How the court might read a document was spelled out by Justice Gibbs of the Australian High Court (in Australian Broadcasting Commission v. Australian Performing Rights Association (1973), p. 109):  Risk allocation in construction contracts 185 [The court must] endeavour to discover the intention of the parties from the words used in the instrument... the whole of the instrument has to be considered... every clause must if possible be rendered harmonious one with another... if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be... capricious, unreasonable, inconvenient or unjust. In addition, the contra proferentem rule provides that where there is an ambiguity in a deed or other instrument the document shall be construed most strongly against the maker. It should be noted that this is a rule of last resort and is to be applied only when the other rules fail to resolve an ambiguity (Taylor Woodrow International Ltd v. The Minister for Health (1978), p. 3). It is proposed to continue the chapter with a discussion of how the authors of a number of standard contracts have dealt with the time/sufficiency of works dichotomy referred to earlier. In doing this the following documents will be discussed: 䊉 AS 4000 (Standards Australia) 䊉 JCC (Royal Australian Institute of Architects, Master Builders Australia Inc., Property Council of Australia) 䊉 PC-1 (Property Council of Australia) 䊉 C21 (New South Wales Department of Public Works and Services) 䊉 NZS 3910-1998 (Standards New Zealand) 䊉 Articles and Conditions of Building Contract (Singapore Institute of Architects, referred to hereafter as SIA) 䊉 JCT – 1980 (Joint Contracts Tribunal, United Kingdom) 䊉 FIDIC – 1996 (Fédération Internationale des Ingénieurs Conseils, the International Federation of Consulting Engineers). The documents used in this discussion were the latest available to the author but it is recognized that some at least of the documents have been superseded by later versions. It is unlikely that any changes would be material to this discussion. The discussion of PC-1 and C21 was included not because of the intrinsic interest in the documents but rather because each represents the untrammelled views of principals as to how risk should be adjusted. It is expected that this examination will reflect the bargaining strength of the negotiating parties and their willingness to compromise. For the sake of convenience the parties to a construction contract are referred to in this discussion as principal and contractor. Different expressions including ‘employer’ and ‘builder’ are used in other contracts. Equally some contracts use the expressions ‘architect’ or ‘engineer’ for the person administering the contract; again for convenience the expression superintendent is used here. Before dealing with the specific provisions of the contracts under discussion it is appropriate to observe that the risk that the completion of the works will be delayed is ever present and one that prudent parties to a contract must deal with. AS 4000 without completion of the schedules produces a very different risk allocation on this area of risk from the remainder of the contracts. Even so, within those other contracts there is a wide variation in how delay is dealt with. Some identify the delay events for what they are and others require the contractor to demonstrate that a delay was ‘beyond his or her control’. For the parties these are serious matters. A delay will cost both parties. The principal will be deprived of the timely completion of the building with the associated loss of income 186 Design and Construction: Building in Value and the contractor must bear the cost of remaining on site until the work is completed. The cost of protracted delays can be of such magnitude as to bring into question the principal’s initial decision to commission the project or the contractor’s decision to enter the contract at the contracted price. If the contract provides that, during the delay, the contractor is not entitled to an extension of time and consequently must pay liquidated damages, then it is the contractor who is bearing the risk. If the contractor is entitled to an extension of time then both parties potentially bear the loss and it could be said that the risk is distributed equally. The principal loses from not having the building completed on time and the contractor must bear the cost of remaining on site. If the contractor is entitled to an extension of time and to recover delay costs then it is the principal who bears the risk. The point to be made is that the parties and their advisers must be aware of the risk and make an informed decision as to where the risk will ultimately lie. After the risk has been appropriately allocated it is incumbent on the parties to adjust their conduct accordingly. 12.5 Disputes with the labour force If the Abrahamson formula were to apply to this area of risk there is little doubt that it would remain with the contractor – the contractor is, after all, the employer of the workforce and, as a matter of law, able within certain parameters to direct and control those workers. In Australia, a distinction is sometimes drawn between labour disputes that are confined to a building site or contractor where it is clear that the contractor is or should be in control of the situation, and national strikes where the presence of this control is less clear. It is noted that the Australian labour force has a propensity to withdraw its labour for reasons that might be characterized as political rather than those intended to procure a concession from a particular employer. Where a disruption to the work is caused by a labour dispute, the question arises as to whether a contractor is entitled to an extension of time to complete the works with the consequent relief from the obligation to pay liquidated damages. A second question arises as to whether or not the principal has agreed to pay delay costs to the contractor during the period of interruption of the work. Under AS 4000 the entitlement of a contractor to an extension of time is dealt with generally under clause 34. The text of the clause invites the parties at the negotiation stage to provide if an extension of time will be granted for delays arising from a labour dispute. To trigger an extension of time for a labour dispute the parties must identify such matter as a qualifying cause of delay in item 23 of the schedule to the contract. For the contractor to be entitled to payment of delay costs (described in the contract as delay damages) under clause 34.9 the parties must take the further step of identifying labour disputes in item 26 of the schedule as a compensable cause. In this regard it is noted that clause 39.4 refers to delay damages but nowhere in the contract is the expression defined or is there a schedule item inviting the parties to agree as to what the damages should be. This means that the legal meaning of damages would apply, that is, an amount of money that would put the contractor into the same position as if the delay had not occurred. To this might be added the qualification that such damage must be a reasonably foreseeable consequence of the delay. It will be seen, that under this contract, the entitlement to both an extension of time and receipt of delay costs must be agreed to by the parties to the contract in the completion of the schedule. Neither entitlement is presumed by the text of the contract.  Risk allocation in construction contracts 187 Clause 9.01 of the JCC document provides that the contractor is entitled to an extension of time for any cause beyond the control of the contractor or for matters that might be broadly characterized as defaults on the part of the principal. The question immediately arises as to whether labour disputes can be said to be beyond the control of the contractor; certainly industry-wide disputes that have a political component could be so classified. It is less certain where the contractor, by some default in his or her obligations to the labour force, causes the strike (say, by the failure to provide statutory workers’ entitlements). Generally the accepted wisdom seems to be that, except in extreme cases, labour disputes are beyond the contractor’s control; therefore the contractor in the event of such a dispute can expect an extension of time and relief from the obligation to pay liquidated damages. The entitlement to delay costs is dealt with in clause 10.10, which requires the parties to specifically deal with the matter in the appendix. There, under item N3, civil commotion and industrial dispute beyond the control of the contractor are listed with the statement that the parties must agree to a percentage (to be stated with a default position of 50%) of the costs and expenses of the delay that each party will bear. It is noted here that the expression costs and expenses is narrower than damages and would limit the sum that a contractor could recover. There is no provision in the document for the parties to agree to what the costs and expenses should be. The combined effect of clause 10.5 and the accompanying contract particulars of PC-1 is to allow the parties to agree that the contractor may claim an extension of time in the event of the progress of the works being delayed by a labour dispute. The payment of delay costs is limited, however, to situations where the time is extended due to a breach of the contract by the principal (clause 10.11). Accordingly the best that the contractor can expect, based on the text of the contract, is relief from liquidated damages. It is not surprising, having regard to the antecedents of the contract, that it has a principal focus. The fact that the C21 document was prepared for use by the NSW Government and its instrumentalities predicates that this contract should also have a client focus. The basis on which an extension of time will be granted for delay resulting from a labour dispute is perhaps more benign than might have been expected. The basis for such an extension is provided in clause 66 1.5-4: strikes or other industrial action not caused or contributed to by the contractor and not confined to the site, the contractor or its sub-contractors. No delay costs are payable in respect of an extension of time thus granted. The NZS 3910, in clause 10.3, provides the basis for a contractor to claim an extension of time. Sub-clause 10.3.1(c) identifies any strike, lockout or other industrial action as grounds for a contractor to claim an extension. Provided the necessary conditions are met, the Engineer (superintendent) must then determine the appropriate extension. There are no provisions for the payment of delay costs consequent upon such determination. Accordingly, the contract favours the contractor in that an extension of time and consequent immunity from liquidated damages is provided for as a matter of course in the text of the document. The SIA contract in clause 23(1)(e) deals with the matter in a way that is directed to the needs of the industry in Singapore. An extension of time is allowable for industrial action by workmen, strikes lock-outs or embargoes (whether domestic or foreign) and in this regard the workmen referred to include those involved in the manufacture or transportation of goods or materials required for the project. The extension is only allowable where the incident was not caused by an unreasonable act or default of the 188 Design and Construction: Building in Value contractor. There is no provision in the contract for the contractor to be paid delay costs in respect of such a delay. Under clause 25.3.1.2 of the JCT form of contract the architect (superintendent) may give an extension of time in respect of the occurrence of a Relevant Event. One of the Relevant Events referred to is defined by clause 25.4.4 as civil commotion, local combination of workmen, strike or lock-out affecting any of the trades employed on the works or those supplying materials and services to the works. There is no provision in the contract for the payment of delay costs in respect of such an event. The least precise of the documents under consideration is the FIDIC contract at clause 44.1(e). There it is provided that the engineer (superintendent) may extend the time for completion for other special circumstances which may occur, other than through a default of or breach of contract by the contractor or for which he is responsible being such as fairly to entitle the contractor to an extension of time. The structure of the clause has the potential to cause difficulties of legal interpretation as, if it were possible to find a common thread running through sub-clauses (a) to (d), the ejusdem generis1 rule might apply and limit the ambit of this provision. It is submitted that no such common thread is to be found and accordingly the rule does not apply. Even so, the expression special circumstances is not free from doubt. It is suggested however that the words fairly to entitle could cover a situation beyond the control of the contractor. In most circumstances, especially with an international contract, it could be said that a labour dispute is beyond the control of the contractor. Accordingly, the contractor could expect to be granted an extension of time with the consequent immunity from liquidated damages. There is no provision in the contract enabling the contractor to claim delay cost for the period of the extension of time. 12.6 Inclement weather It is probably trite to make the point that the weather is beyond the control of either party to a contract. Accordingly, Abrahamson’s first and second principles have no application. What can be done in the event of bad weather occurring can only be done by the contractor (thereby invoking the third principle) and equally it is the contractor who has the greatest incentive to plan for and deal with the risk (fourth principle). Add to this the fact that weather is cyclical, and that records have been kept for centuries, and it could be suggested that it would be reasonable for principals to routinely require the contractor to assume the risk for this event. Not so, and the different approaches taken by the authors of standard documents require contractors to exercise caution. The provisions of AS 4000 relating to extensions of time for labour disputes apply equally to delays caused by inclement weather. For a contractor to be entitled to an extension of time under clause 34 for this circumstance reference would need to be made to inclement weather in item 23 of the schedule and if the contractor wished to recover delay damages, the matter would need also to be included in item 26 as a compensable cause. Some care would need to exercised here in drafting the actual words to be used in item 23 of the schedule. It is noted that the expression inclement weather is used in clause 1 (definition section of the document) but then only to exclude extensions of time for inclement weather occurring after the date for practical completion. The expression does not merely denote rain but might include a high wind that prevented the operation of a  Risk allocation in construction contracts 189 crane. It should also be noted that in Australia the workforce cannot be compelled to work in the rain and after a qualifying period of rain each morning the workers are allowed to go home notwithstanding the extent to which the weather improves. For a certain number of days each month the workers are paid for such absences. On this basis the cessation of work on a job might not always coincide with the accepted view of what constitutes inclement weather. Accordingly care needs to be taken with the words used in the schedule. Where a contractor is entitled to an extension of time for inclement weather he/ she is thereby relieved of the obligation to pay liquidated damages. As with AS 4000, inclement weather in the JCC document is dealt with under the general extension of time provision. Clause 9.01 allows a contractor an extension of time for a cause beyond the control of the contractor. There is little doubt that inclement weather is beyond the control of the contractor and accordingly the contractor is entitled to an extension of time and relief from liquidated damages. Appendix N5 allows the parties to provide who will bear the economic cost of a delay caused by inclement weather. If the parties do not complete the appendix, each will bear half of the cost of the delay. In this regard it is interesting to note that the basis of recovery is for inclement weather or conditions resulting from inclement weather. This extends the period of the delay for which costs and expenses might be recovered. A simple example would be where the period of rain was brief but the consequent flooding of the site prevented work for several days. Clause 10.5 and the accompanying contract particulars of PC-1 allow the parties to agree that the contractor may claim an extension of time in the event of the progress of the works being delayed by inclement weather. As in the case of labour disputes, delay costs are not payable. The best that the contractor can expect is relief from liquidated damages. Under C21 the entitlement of the contractor for an extension of time for a delay resulting from inclement weather is spelt out in some detail. The basis for such an extension is provided in clause 66 1.5-5 inclement weather, where the aggregate number of days entitling the contractor to an extension has exceeded the allowance stated in the Contract Information. The Contract Information is an annexure to the contract and item 25 sets out a space for the contractor to state the number of days it has allowed in its calculation of the price/construction period for interruption to the progress of the work due to inclement weather. How the parties would deal with such a provision is not clear. It is probably intended to encourage the contractor to allow for what might be the foreseeable instances of inclement weather gleaned from, say, weather records. Accordingly an extension of time would be allowed for what might be characterized as abnormal conditions. The way the item is completed would depend on the negotiating strengths of the parties. As in the case of a labour dispute the contractor is allowed only an extension of time in the circumstances described, with relief from liquidated damages but no delay costs. The NZS 3910, in sub-clause 10.3.1(b), identifies weather sufficiently inclement to interfere with the progress of the works as grounds for a contractor to claim an extension of time. Whilst the text of the sub-clause is more expansive, it is doubtful if anything is gained by the additional words, as the requirement for the weather conditions to have a bearing on the progress of the works would almost certainly be implied. As in the case of labour disputes, there are no provisions for the payment of delay costs. The SIA contract, in clause 23(1)(b), deals with the matter in a comprehensive way. An extension of time is allowable for exceptionally adverse weather conditions (in assessing 190 Design and Construction: Building in Value the same regard shall be had to the meteorological averages, the reasonable expectation of adverse conditions both seasonable and annual during the contract period, and to the net effect overall of any exceptionally beneficial conditions as well as the immediate effect of individual instances of exceptionally adverse conditions). The clause requires the contractor to take into account the likely weather conditions during the contract period and it is clear from the text that no extension of time will be allowable for weather conditions that are to be expected in Singapore. The clause is even more restrictive in that favourable conditions, that may have the effect of reducing an extension of time otherwise available as a result of exceptionally adverse conditions, are also to be taken into account. As in the case of labour disputes, there is no provision in the contract for the contractor to be paid delay costs in respect of such a delay. Under clause 25.3.1.2 of the JCT form of contract, the architect (superintendent) ‘may give an extension of time’ in respect of the occurrence of a ‘Relevant Event’. One of the ‘Relevant Events’ referred to is defined by clause 25.4.2 as ‘exceptionally adverse weather conditions’. Although the operative words are the same as those in the SIA contract this contract does not have the added words in parenthesis. It is not clear how much this omission would affect the meaning of the contract save that the contractor may be able to argue that he or she need not set off the benefit of favourable conditions against exceptionally adverse conditions. No delay costs are payable in respect of such an event. Clause 44.1(c) of the FIDIC contract provides that the engineer (superintendent) may extend the time for completion for exceptionally adverse climatic conditions. As with NZS 3910, the SIA contract and JCT, this clause will require the contractor to take account of those weather conditions that might be expected. Where an extension of time is granted the contractor would be immune from the obligation to pay liquidated damages. As indicated previously, there is no provision in the contract for the contractor to claim delay costs. 12.7 Scope of works/latent conditions A persistent source of dispute in construction contracts is the definition of the extent of the contractor’s technical obligation. In general terms it is the work shown on the contract drawings and described in the specification. Contractors will want their obligation confined to the narrow limits of what these documents say whereas principals will argue that the obligation extends to work that might be inferred from the obligation to reproduce what is shown in the drawings and specification. The problem is illustrated by considering a drawing showing a building supported by appropriate foundations without any statement of the nature of the soil that needs to be excavated to construct those foundations. The contractor can fulfil its obligation by reproducing what the contract documents call for although the cost will be very different depending upon whether it is necessary to excavate in rock or earth. Where the obligation falls in a case such as that described is not necessarily answered by the standard clauses describing work or defining a variation to that work. This is particularly the case where a bill of quantities does not form part of the contract. For this reason it is common to find included in contracts clauses extending the scope of the works and specifically allocating the risk for the extra cost where adverse sub-surface soil conditions are encountered. It is proposed to examine how these issues have been dealt with in the contracts already examined.  Risk allocation in construction contracts 191 Under AS 4000 the contractor’s basic obligation is to carry out and complete work under the Contract (clause 2.1). There is no attempt to extend the scope of the contractor’s obligation, however, care is taken to deal with the unforeseen site conditions which are dealt with under the rubric of latent conditions. Latent conditions are defined as conditions on the site... excluding weather conditions, which differ materially from the physical conditions which should reasonably have been anticipated by a competent contractor at the time of the contractor’s tender if the contractor had inspected (clause 25.1). The effect of clause 25.3 is, after the contractor gives notice, to deem the work associated with a latent condition a variation. Where appropriate the construction time will be extended. The contractor is entitled to recover the cost of executing the additional work, delay costs, overhead expenses and profit. The JCC document follows the same drafting policy as AS 4000. The contractor’s obligation is to proceed to execute and complete the works in accordance with this agreement (clause 1.03.02). The works are those described in the annexed drawings and specification (clause 1.02.05). Site conditions that differ from the conditions and characteristics shown, described or measured in this agreement or give reasonable cause for the Builder (contractor) to consider that the works require to be varied, are treated as a variation (clause 3.02). The text of PC-1 makes the point to the contractor that he or she must concern himself or herself with the scope of the works. Clause 7.1 under the title The Site provides The Contractor warrants that it has, and will be deemed to have, done everything that would be expected of a prudent, competent and experienced contractor in: (a) assessing the risks which it has assumed under the contract, and (b) ensuring that the Contract Price contains allowances to protect it against any of these risks eventuating. Pursuant to the ‘belts and braces’ principles of legal drafting, the contract continues, the contractor warrants that it has received but not relied on the site information provided by the owner (principal), clauses 7.2 and 7.7. Under the title Construction, a further disclaimer: The Contractor has allowed for the provision of all plant, Equipment and Work, materials and other work necessary for the Contractor’s activities, whether or not mentioned in the Works Description or any Design Documentation, clause 8.2. These clauses are no doubt designed to protect the principal against claims for variations for items not mentioned in the contract documents. Given the detail of design documentation and the definition of variation in the Glossary of Terms annexed to the contract, this approach may not extend the contractor’s obligation far beyond that in the contracts described to this point. Latent conditions are defined in the Glossary of Terms in much the same way as in the other documents. It is noted, however, that under clause 7.4 the additional work necessitated by such an event is not treated as a variation and the contractor is entitled to recover only extra costs. This would exclude a claim for profit related to such work. The C21 is another document evolved from the point of view of the principal and it is therefore no surprise to find a clause that seeks to limit claims for incomplete descriptions of the work. Clause 52.2 utilizes a slightly different text, viz., The Contractor acknowledges that: it is both experienced and expert in construction of the type and scale of the works; and it is fully aware that there are likely to be items not specifically referred to or described in the Contract which nonetheless are required to complete the works and achieve the effective and efficient operation of the works and 192 Design and Construction: Building in Value... it has made full allowance for such items in the Contract Price. Notwithstanding the differences in text, the clause is likely to have the same legal effect as the equivalent clause in PC-1. Clause 41.1 provides that additional work directed as a result of site conditions (latent conditions) is to be valued as variation save that no payment will be made for costs of delay or any aborted work. The NZS 3910 does not include any provisions purporting to extend the scope of the contractor’s obligation beyond that of executing the work described in the contract documents, that is, to construct, complete, deliver and remedy defects in the works and things described, second schedule. Clause 9.5 defines unforeseen physical conditions (latent conditions) as has been the case in other contracts save that the definition includes weather conditions provided those conditions are the result of weather away from the site, clause 9.5.1. An example of such conditions would include inclement weather at the location of a quarry that prevented the quarrying of aggregate needed to batch concrete for the project. Clause 9.5.4 then provides that the effect of the conditions notified shall be treated as if it was a variation. The SIA document does not contain any attempt to extend the scope of the obligation of the contractor, who agrees in the Articles of Agreement to carry out, bring to completion, and maintain for the employer (principal) the building and other works. Latent conditions are not dealt with as such, however, clause 14 provides that Should any discrepancy or divergence be discovered in or between any of the Contract Documents as to the precise extent of the nature of the work to be carried out by the contractor the architect (superintendent) is required to give a direction or instruction. Depending on what is required, the matter is then treated as a variation. As the contract requires the use of a bill of quantities in which the excavation and foundation structure is measured, the contractor would be protected by way of either variation or adjustment to the quantities. Like the SIA document, the JCT does not purport to extend the scope of the contractor’s obligation. Clause 2.1 provides that the contractor shall upon and subject to the Conditions carry out and complete the works shown upon the Contract Drawings and described or referred to in the Contract Bills. Equally, there is no specific reference to latent conditions. This contract also relies on the use of a bill of quantities and presumably the work associated with sub-surface conditions would be measured. On this basis any change needed to this work would be dealt with initially under clause 2.2 and then as a variation under clause 13.2. Finally, the FIDIC takes the matter a little further, in clause 8.1 which says: The Contractor shall, with care and diligence, design (to the extent provided for by the contract), execute and complete the Works and remedy the defects therein in accordance with the provisions of the Contract.... [S]o far as the necessity for providing the same [labour, materials and plant] is specified in or is reasonably inferred from the Contract. Clause 12.2 defines latent conditions (here referred to as Not Foreseeable Physical Obstructions or Conditions) in a similar way to the other contracts discussed in this chapter. Clause 12.2 provides that the contractor may recover the cost of additional work necessitated by the discovery of such conditions and the time for completion of the project appropriately extended. The reference in clause 12.2(b) is to the recovery of costs which may have been incurred without reference to the variation provisions (clauses 51 and 52) which suggests that it is the cost only that is recoverable rather than the cost plus a profit margin.  Risk allocation in construction contracts 193 12.8 Conclusion It will be seen that there is considerable variation in the approach of the authors of the contracts discussed. In all instances save AS 4000 and PC-1 a contractor has some right to claim an extension of time for a delay arising from a labour dispute. This is possible under AS 4000 and PC-1 only if the schedule is completed appropriately. There is a potential for the contractor to claim delay costs in these circumstances under AS 4000 and JCC. This again will depend on how the schedule of AS 4000 is completed and under JCC the parties share the loss arising from a labour dispute equally unless the position is altered in the appendix. No other document provides for recovery by the contractor in such circumstances. The treatment of inclement weather also differs from contract to contract. In a sense, if the contractor is granted an extension of time, then both parties share the burden of the delay more or less equally. The principal is deprived of his or her building during the delay without the compensation of liquidated damages and the contractor must maintain a presence on the site for the extended time without extra payment. With AS 4000 and PC-1 the parties must agree in the schedule that there will be an extension of time in the event of inclement weather. Only under AS 4000 and JCC is there a potential for the contractor to recover costs during the delay. The drafting of the inclement weather clauses in C21, SIA, JCT and FIDIC restricts the contractor’s right to an extension of time to circumstances where the weather could be characterized as abnormal. The contractor must therefore allow in his or her time/cost calculations for what would be the average inclement weather during the construction period. The authors of PC-1, C21 and FIDIC have used an expanded definition of the scope of the works, no doubt, in an attempt to head off claims for minor variations and ‘claimsmanship’ generally. Since PC-1 and C21 were contracts prepared on behalf of principals the intention is understandable, however, the efficacy of such legal drafting in a construction contract is by no means guaranteed. There is considerable diversity in the way the documents deal with latent conditions: AS 4000, JCC and NZS 4360 all define latent conditions in a similar manner and treat the need to execute additional work arising from such conditions as a variation. Under PC-1 and FIDIC the contractor can recover only the cost of the additional work and must forego the profit which would have been payable if the work were treated as a variation. The SIA and JCT documents do not have latent conditions clauses as such but since both documents are intended for use with a bill of quantities as a contract document, a claim for the costs associated with latent conditions could be based on adjustment of the measured quantities. Probably the same matrix of risk allocation could be achieved using any of the documents discussed but this will not follow from the mere execution of the document. There are subtle differences and the obligations of the parties could be determined by the manner of completing the schedules to a particular document. In some instances it will be necessary to amend the document to achieve the result required. For a contractor the way the risks discussed are allocated could make the difference between a profit and a loss on a project. It should also be noted that this chapter purports to deal by way of comparison with only a sample of the risks encountered in the construction process. There, are of course, many more risks that need to be taken into account. A significant risk falling into this category is cost of a delay to the contractor whilst design problems are sorted out. 194 Design and Construction: Building in Value Endnote 1 This is a rule of legal interpretation to the effect that the meaning of general words in a document may be restricted to the same genus as the specific words that immediately precede them. References and bibliography Abrahamson, M. (1979) Engineering Law and the I.C.E. Contracts. Fourth edition (London, Applied Science Publishers Ltd). Atiyah, P. (1981) Promises Morals and the Law (Oxford: Clarendon Press). Australian Broadcasting Commission v. Australian Performing Rights Association (1973) 129 CLR 99. Bunni, N. (1998) The FIDIC Form of Contract. Second edition (Blackwell Science). Cremean, D. (1995) Brooking on Building Contracts. Third edition (Melbourne: Butterworths). Davenport, P. (1991) Risk allocation – a new approach. Australian Construction Law Newsletter 19, 21. Dorter, J. and Sharkey, J. (1990) Building and Construction Contracts in Australia Law and Practice (LBC Information Services). May, A. (1991) Keating on Building Contracts, Fifth edition (London: Sweet & Maxwell). NPWC/NBCC (1990) No Dispute, Strategies for Improvement in the Australian Building and Construction Industry. Report by NPWC/NBCC Joint Working Party, May. Taylor Woodrow International Ltd v. The Minister for Health (1978) 19 SASR 1. W.D. & H.O. Wills (Australia) Limited v State Rail Authority of New South Wales; State Rail Authority of New South Wales v TNT Management Pty Limited, Matter Nos CA 40577/95; CA 40663/95 NSWSC 81 (3 April 1998).