Stephen Natoli - Holding Redlich - Contract law - resolving the risk apportionment issue

© Holding Redlich 2015

Risk Apportionment in Construction Contracts

Civil Contractors Federation National Conference

Stephen Natoli

16 October 2015

© Holding Redlich 2015 © Holding Redlich 2015

General overview

What is Risk Types of Risks

Basic Risk Analysis

Risk Allocation – theory vs practice

The Usual Suspects

Risk Mitigation Tools



What is risk?

Risk Effect of uncertainty on objectives Outcome must be uncertain

and relevant

Linked to strategy “Risk Appetite” – position on the

risk/return curve (depends on capacity) “Risk Tolerance” – acceptable exposure to a

particular risk (generally quantified)



Types of Risk

Construction risk (e.g., technical, design, cost, schedule, quality etc.)

Sovereign risk (e.g., change of law) Performance risk Market risk (e.g., economic conditions) Financing risk Asset risk Contractual risk (e.g., warranties, indemnities,

force majeure etc.)



Basic Risk Analysis

Risks identified

Risks quantified (likelihood x consequence)

Prioritised – e.g.‘Hot risks’ addressed

Ongoing monitoring



Basic Risk Analysis



Risk Allocation - in theory

Who is best placed to control/manage the risk? Who can transfer the risk (e.g., insurance,

specialist subcontractor) Who has the greatest economic incentive to

manage the risk? Who is the most efficient party top manage the

risk? Who bears the risk at first instance?



Risk Allocation - in practice



Function of the Contract

Risk Allocation Tool Should clearly state:

Rights

Responsibilities

Quality standards

Timing

Cost

Consequences if breached



Risk management tools

Warranties Indemnities Insurance Limits on liability Project controls Sharing tools Priced Laid off

Risk management basics



Workshop

What contractual risks typically get passed onto to you?

Can you successfully resist them?

If not, how do you manage the risk?



Workshop

The usual suspects

Variations

Extensions of Time

Latent Conditions

Discrepancies

Defects



Seeking relief

Claims mostly fought over time and scope issues (usually connected)

Consider:

Notification requirements

Time bars and waivers

Is there a back door to relief?



The usual suspects - variations

Contract price is normally fixed to scope of works Contractor may be directed to vary the works under contract

(WUC) by the Superintendent at any time before the date of practical completion by any one or more of the following: a) Increase, decrease or omit any part of the WUC

b) Change the character or quality of any part of the WUC

c) Change the levels, lines, positions or dimensions of any part of the WUC

d) Carry out additional work

e) Demolish or remove material or work no longer required by the Principal




Does the contract require a written direction to vary before work can be characterised as a variation?

If it is possibly contentious then what is the case for it being a variation?

What do I have to do and within what timeframe?

Have I documented cost adequately? Is there a time implication?




1 • Instructions received (if verbal go to 2 &3 but if written go to 4)

2 • Request a written variation direction (within 48 hours)

3 • Receive written direction

4 • Provide estimated price and projected impact on programme (within 5 days of receipt

of written direction to vary)

5 • Approval of price to be provided by Superintendent/ Principal within 48 hours

6 • Commence Work

7 • Value variation and submit as part of claim to payment



The usual suspects - Variations

Key considerations: Notice requirements (e.g., content and time

limits) Scope

Risk Mitigation considerations: Project controls measures Risk sharing tools (e.g., risk ceiling or floor) Scope (e.g., exclusions, qualifications etc.)



The usual suspects - Extensions of time

The basic obligation

the Contractor must ensure that WUC reaches practical completion by the date for practical completion

A failure to meet the obligation typically leads to liquidated damages



The usual suspects - Extension of time

Typical Requirements 1. Qualifying cause of delay 2. Notification within a certain time after delay

becomes evident 3. Activities on critical path must be delayed 4. Must prove that practical completion has been, or

will be delayed 5. Must submit claim within certain time after the

“delay occurs” or “delay ceases”



The usual suspects - Extension of time

Do I have a program in place that has enough detail in it to be able to credibly assess the impact of a delay event?

Have you experienced an event which is going to affect your ability to achieve PC on time – are activities on the critical path delayed?

How long after the delay event must I notify? What can I do to mitigate any delay?



The usual suspects - Extensions of Time

Key considerations: Qualifying cause of delay Notice requirements (eg content and time limits)

Risk Mitigation considerations:

Project controls measures Indemnities Risk sharing tools (eg risk ceiling or floor) Caps on liability (eg LD cap)



The usual suspects – Latent Conditions

What are they?

Standard clause from AS4300-1995:

Latent Conditions are:

a) physical conditions on the Site or its surroundings, including artificial things but excluding weather conditions, which differ materially from the physical conditions which should reasonably have been anticipated by the Contractor at the time of the Contractor’s tender if the Contractor had:

i) examined all information made available in writing by the Principal to the Contractor for the purpose of tendering;

ii) examined all information relevant to the risks, contingencies and other circumstances having an effect on the tender and obtainable by the making of reasonable enquiries; and

iii) inspected the Site and its surroundings; and

b) any other conditions which the Contract specifies to be Latent Conditions.




Notification

If during the execution of the work under the Contract, the Contractor becomes aware of a Latent Condition, the Contractor shall forthwith and where possible before the Latent Condition is disturbed, give written notice thereof to the Superintendent.

If required by the Superintendent, the Contractor shall provide to the Superintendent a statement in writing specifying:

a) the Latent Condition encountered and in what respects it differs materially;

b) the additional work and additional resources which the Contractor estimates to be necessary to deal with the Latent Condition;

c) the time the Contractor anticipates will be required to deal with the Latent Condition and the expected delay in achieving Practical Completion;

d) the Contractor’s estimate of the cost of the measures necessary to deal with the Latent Condition; and

e) other details reasonably required by the Superintendent.




Time and cost relief

Delay caused by a Latent Condition may justify an extension of time under Clause 35.5. If a Latent Condition causes the Contractor to: a) carry out more work; b) use more Constructional Plant; or c) incur more cost (including but not limited to extra costs for delay or

disruption),

than the Contractor could reasonably have anticipated at the time of tendering, a valuation shall be made under Clause 40.5.




What are they? Amended clause – additional requirements Latent conditions are physical conditions on the site and its near surrounds, including artificial things but excluding weather conditions, which differ materially from the physical conditions which should reasonably have been anticipated by a prudent, experienced and competent contractor at the date of Contract if such contractor had: a) inspected all written information made available by the Purchaser to the

Contractor for the purpose of tendering; b) inspected all information influencing the risk allocation in the Contractor's

tender and reasonably obtainable by the making of reasonable enquiries; c) inspected the site and its near surrounds; and d) done those things referred to in the subclause on the next slide.




Additional requirements The Contractor warrants that it did (and it is deemed to have done) each of the following things before the date of Contract:

a) examined and carefully checked and acquired actual knowledge of the contents of the documents which constitute the Contract;

b) Informed itself completely as to:

i) site conditions;

ii) the risks, contingencies and other circumstances which might have an effect on the execution of WUC or the cost of executing WUC;

iii) the nature of the work and of the plant, equipment, materials and other items necessary for the execution of WUC and the means of access to and facilities and services at the site and the means of transport, transport routes and facilities for deliveries to and from the site;




iv) all measures necessary to protect the environment from any adverse effect or damage arising from the execution of WUC or the operation of the Works;

c) satisfied itself as to the correctness and sufficiency of its price for WUC and that the contract sum covers the cost of complying with all of its obligations under the Contract and of all matters and things necessary for the due and proper performance and completion of its obligations under the Contract; and

d) obtained all appropriate professional and technical advice with respect to the matters referred to in this subclause, and any failure by the Contractor to have done any of those things will not relieve the Contractor of its obligation to perform and complete WUC in accordance with the Contract.




Alternatively providing no cost or time relief

The Contractor: a) is responsible for, and assumes the risk of, all increased costs and

any losses and expenses in respect of the physical conditions and characteristics of the site and its surroundings encountered during the WUC; and

b) acknowledges and agrees that it will not be entitled, in any circumstances, to any additional payment for, or EOT in relation to, any such physical conditions and characteristics.




Key considerations Relief event?

Notification requirements (e.g., timing and content)

Risk mitigation strategies Project control measures

Warranties/indemnities

Scope



The usual suspects – Discrepancies in Documents

Who bears risk for discrepancies/errors in contractual documents

Standard clause from AS4300:

The several documents forming the Contract are to be taken as mutually explanatory of one another. If either party discovers any ambiguity or discrepancy in any document prepared for the purpose of executing the work under the Contract, that party shall notify the Superintendent in writing of the ambiguity or discrepancy. In the event of an ambiguity or discrepancy being discovered and brought to the attention of the Superintendent, or discovered by the Superintendent, the Superintendent shall direct the Contractor as to the interpretation to be followed by the Contractor in carrying out the work.




If the direction causes the Contractor to incur more or less cost than the Contractor, having complied with Clause 4.1(c), could reasonably have anticipated at the time of tendering, then to the extent that such ambiguity or discrepancy is: a) in the Principal’s Project Requirements, the difference shall be

valued under Clause 40.5; and

b) in the Design Documents or between the Design Documents and the Principal’s Project Requirements, such ambiguity or discrepancy shall be at the Contractor’s risk and the direction shall not entitle the Contractor to any extra payment or an extension of time.




Who bears risk for discrepancies/errors in contractual documents

Amended Clause The Contractor warrants that it has thoroughly examined and reviewed all plans, drawings and specifications, Principal's Project Requirements and other documents relating to the WUC, the Works and that those plans, drawings and specifications and Principal's Project Requirements are: a) suitable, appropriate, complete and adequate for the purposes

of constructing the Works and carrying out the WUC; and b) consistent with and conform with, all legislative requirements

and all requirements of the Building Code of Australia; and




c) it has not identified, except as previously notified to the Principal or the Superintendent in writing, any inconsistency, ambiguity, omission or discrepancy.

The Contractor is not entitled to claim any adjustment to the contract sum or make any claim for an EOT arising out of or in connection with any inconsistencies, ambiguities or discrepancies in any document forming this Contract.




Key considerations

Standard of care (eg. full risk vs competent contractor vs no risk)

Notification requirements (eg. timing and content)

Risk mitigation strategies

Project control measures

Warranties/indemnities

Scope



The usual suspects - Defects

When are you responsible for rectifying defects and what is the consequence of failing to meet these obligations?



The usual suspects - Defects

Key considerations: Scope of defect rectification obligations

Risk Mitigation considerations: Caps on liability

Project controls measures

Indemnities

Risk sharing tools (e.g., risk ceiling or floor)

Laid off risk



Risk mitigation tools - Warranties

Contractual statement of fact Aims to put claimant in position it would have

been in if warranty was true Breach of contract with damages a remedy



Risk mitigation tools - Indemnities

Contractual promise to hold a specific person harmless against specified losses or the occurrence of a particular event

Consider Scope (e.g., loss covered)

Trigger event

No issue of remoteness of damage or obligation to mitigate



Risk mitigation tools - Insurance

Policy risk (e.g., limits of policy)

Procedural risk (e.g., compliance)

Quantum risk (e.g., excess)

Indemnity vs insurance (e.g., contractual terms vs policy terms)

Role of caps on liability



Risk mitigation tools – Caps on liability

Types of caps (e.g., financial caps, consequential loss exclusion, LD cap, sunset liability)

Exclusions

Role of insurance



Risk mitigation tools – Control Procedures

Types (e.g., project management plans, risk registers, issue registers)

Regular, documented meetings to consider key risks

Project meetings – use the minutes to your advantage



Key Contacts


Disclaimer The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this publication is accurate at the date it is received or that it will continue to be accurate in the future. We are not responsible for the information of any source to which a link is provided or reference is made and exclude all liability in connection with use of these sources.

Stephen Natoli

Partner

T +61 3 9321 9796

E [email protected]


Stephen Natoli - Holding Redlich - Contract law - resolving the risk apportionment issue

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Transcript of Stephen Natoli - Holding Redlich - Contract law - resolving the risk apportionment issue