Charles Gavamukulya, MCIArb,AICCP

  • Quality management on construction projects in Uganda: The Impact of the Sale of Goods and Supply of Services Act, 2018

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    Charles Gavamukulya, MCIArb,AICCP

    Introduction

    The triple constraints in project management include quality, cost and time. Each project’s objective is to be successful within this triple constraint. Quality management on construction projects includes managing aspects of design, workmanship and materials which all interact in order to create the final product. In the face of defects, there is always a need to determine the standard of quality expected, the cause of the fault -design, materials and/or workmanship, and who is liable-whether there is a unitary or split responsibility. This article explores the different aspects of quality management and the impact of the Sale of Goods and Supply of Services Act, 2018 on quality management. Reference will be made to the FIDIC and PPDA forms of contract which are the major standard form contracts used in Uganda.

    Standard of Work

    The Contractor’s basic obligation, so far as the standard of work is concerned, is to comply with the terms of the contract. This includes both the express and implied terms. Express terms include provisions in standard form contracts such as Sub-clause 7.1[Manner of Execution] of FIDIC forms of Contract and clause 16 of the PPDA forms of Contract while implied terms include those provided for by statute. The standard of work required on a construction project can be explored in three separate, albeit linked, ideas which are subsequently discussed below.

    1.Workmanship

    The standard of workmanship may be defined in considerable detail by the contract, for example by requiring it to comply with an appropriate code of practice. Under PPDA Contracts, such a requirement is in clause 16.1 which states that “The Contractor shall construct and install the Works in accordance with the Specifications and Drawings.” Under the FIDIC forms of Contract, Sub-clause 7.1 [Manner of Execution] obliges the Contractor to “…carry out the works in a proper workmanlike and careful manner, in accordance with recognized good practice…”

    A similar, if not identical, obligation would be in any case implied by law since, in the absence of any express terms covering this issue, the courts will imply a term in the contract that the work will be carried out with proper skill and care, that is to say, in a “workmanlike” manner. This can be the case for PPDA forms of contract which are not as descriptive as the FIDIC forms of contract on this issue.

    2.Standard of materials

    Sub-Clause 1.1.5.3 of the FIDIC forms defines Materials while Sub-clause 7.1 [Manner of Execution] of FIDIC forms states that the manner of execution should be with properly equipped facilities and non-hazardous materials. PPDA form of contracts defines materials in clause 1.1(w) but are not as expressly descriptive about the standard of materials to be used in the construction process.

    In the case of Young & Marten Ltd v McManus Childs Ltd [1] it was held that a contractor will be liable if materials are unsatisfactory, even where it is the employer who has selected those materials (for example by nominating a particular supplier). However, it has also been held in the case of Gloucestershire CC v Richardson [2] the contractor will not be liable for defective materials where they were forced by the employer to obtain those materials from a supplier who, to the employer’s knowledge, excludes or limits liability for defects.

    3.Suitability of materials

    Even where materials are of satisfactory quality, in the sense of being free from defects, they may still not be fit for the purpose for which they are used. In this case, it is possible for the contractor to be liable, but the term to be implied here is of a more limited kind. Section 15 of the Sale of Goods and Supply of Services Act, 2018 implies a term that goods shall be reasonably fit for the purpose for which they are supplied, but only where it is clear that the recipient is relying on the skill and judgement of the supplier. Such reliance on the contractor and thus liability for unfit materials can only be found where the contractor has the choice of materials. As such, there will be no such implied term in respect to materials specified by the employer or the contract administrator because in that case, there is no reliance on the contractor.

    Responsibility for Design

    Whereas the traditional contract delivery systems draw a strict dividing line between the functions of design and construction, there has been an increased uptake for design and build projects where the contractor takes on both functions on a construction project. This contrasts sharply with the traditional method where design was under the ambit of the employer and construction under the ambit of the contractor. As such, there is a need to establish a standard of liability for design.

    Standard of liability for Design

    One of the most interesting questions concerning a designer’s duty is whether it is limited to an obligation to use reasonable skill and care or whether it goes beyond this to a guarantee that the design will be fit for its purpose. If the former is correct, it means in effect that a designer will only be liable if professional negligence can be proved. The latter interpretation, on the other hand, would impose on the designer a type of liability equivalent to that of a seller or other supplier of goods. The courts have made it clear that a guarantee of “fitness for intended purpose” will be implied into a design and build contract in the case of Greaves & Co (Contractors) Ltd v Baynham Meikle and Partners [3]. It must be recognized that the traditional legal position favours liability on the part of a “pure designer” only where there is negligence as it was held in the case of Hawkins v Chrysler (UK) Ltd and Burne Associates [4].

    The implication of a strict “fitness for the purpose” obligation into design and build contracts will not be negated by the mere fact that the actual design is carried out by a sub-contractor nominated by the employer.

    However, where it is clear that the employer has placed no reliance whatsoever on the main contractor in respect of the design, there will be no implied term as seen in the case of Norta Wallpapers (Ireland) v Sisk & Sons (Dublin) Ltd[5]. While it may indeed be easy for a court to imply the higher standard of obligation into a design and build contract, this cannot override any contrary express terms between the parties.

    The FIDIC books principally split the design and build functions in the Red and Pink Book but provide for design and build with the contractor in charge of both design and workmanship in the Yellow and Silver Books. Subclause 4.1[Contractor’s General Obligations] allows for the Contractor to execute and complete the Works in accordance with the contract. However, for the Red and Pink books, it also makes a provision for the possibility that the Employer may wish that the Contractor designs a part or parts of the Works. Sub-clause 5.4 [Technical Standards and Regulation] requires that the design must be compliant with the Country’s technical standards and laws applicable to the product being produced from the Works.

    In the Yellow Book, the Contractor’s design obligations are set out in Sub-clause 4.1 and repeated under Sub-clause 5.1[General Design Obligations]. The PPDA forms are not as descriptive about the design aspect for works in comparison to the FIDIC forms however they provide for the Contractor to be responsible for design of Temporary Works under clause 18.2. The requirement is for the Drawings from the Contractor in that instance to be compliant with the Specifications and Drawings in the Statement of Requirements.

    Impact of the Sale of Goods and Supply of Services Act, 2018 on quality management

    From the foregoing, it is true that two standards apply, that is, “reasonable skill and care” for the “pure designers and “fitness for purpose” for design and build contractor. The reasonable skill and care standard relates more to supply of a service by a designer or engineering team while the fitness for purpose standard is an apparently higher standard for a contractor as it relates more to sale of goods.

    Given that the construction contracts are meant to be conducted under the ambit of the law, and for the case of FIDIC forms which give express provision for compliance with laws relating to the product being produced from the Works under Sub-clause 5.4, the Sale of Goods and Supply of Services Act 2018 implies terms in construction contracts.

    The Sale of Goods and Supply of Services Act 2018 implies in Section 15(3) that the goods supplied under the contract should be of satisfactory quality. It further defines goods of satisfactory quality in section 15 (5) as those that meet the standards that a reasonable person would regard as satisfactory, taking into account any description of the goods, the price and all the other relevant circumstances. As such, materials supplied to construction projects must be of satisfactory quality and must fit within this definition.

    Quality of goods is further defined in section 15(6) to include:

    1. their state, condition, appearance and finish;
    2. their fitness for all the purposes for which goods of the kind in question are commonly supplied;
    3. safety; and
    4. durability.

    The first effect of this Section is that it recognizes the two standards of “reasonable skill and care” and “fitness for purpose”.

    The effect of this Section, in my opinion, is that it enforces implied terms for workmanship and design. Given that it is arguable that workmanship refers only to the standard of the final item, Section 15(6)(a) expounds on quality of the product from executing of works and therefore provides implied terms as to the quality of the finished product on construction projects.

    This can be of particular importance for PPDA form of contracts which are not as descriptive as the FIDIC contracts on this aspect. This section proceeds to recognise that for the sale of goods contracts for instance design and build projects, there is an implied obligation to the contractor to satisfy the fitness for purpose standard.

    The Act therefore places a higher standard of obligation on a contractor in design and build projects. The FIDIC forms expressly provide for the Works to be in accordance with the law that governs quality of finished products and therefore this higher standard will be recognizable on projects using the FIDIC forms. Whereas the PPDA forms do not have the same express provision, it can be an implied term by Statute.

    Conclusion

    In conclusion, the Sale of Goods and Supply of Services Act 2018 contains implied terms that govern quality management on construction projects in the light of the fact that both design and build projects plus the traditional project delivery method contracts lie within the ambit of this Act. The Act provides wide ranging provisions that not only govern the quality and suitability of materials supplied but also the quality of workmanship and fitness for purpose of the finished product. Indeed, the FIDIC forms of contract expressly provide for the standards of quality provide for in the Act to be met by the contractor in Sub-clause 5.4 while the same terms can be implied in PPDA forms of contract which do not have the same express provision.

    [1] [1969] 1 AC 454.

    [2] [1969] 1 AC 480.

    [3] [1975] 3 All ER 99.

    [4] (1986) 38 BLR 36.

    [5] [1978] IR 114

  • Role of Courts in Arbitration: International Perspective and Ugandan context.

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    Charles Gavamukulya, MCIArb,AICCP

    Introduction

    Arbitration is always presented as an Alternative Dispute Resolution (ADR) mechanism where parties do not have to go to court to resolve a dispute and rather submit the dispute to a neutral third party who renders an award. The key question that arises then is whether the courts have a role in arbitration and if so, what the extent of this role is.

    In this article, we shall delve into the role of courts in arbitration from both an international and domestic Ugandan perspective. The international perspective will be based on the UNCITRAL Model Law while the domestic Ugandan perspective will be based on the Arbitration and Conciliation Act 2000.

    International perspective with the Model Law

    The United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration 1985 with amendments as adopted in 2006 (herein referred to as “the Model Law”) outlines the role of courts in arbitral proceedings. Article 5 of the Model Law points out specific circumstances where courts can intervene in arbitration, limiting their interference to supporting the process. Furthermore, the Model Law does not allow judicial supervision on procedural decisions as was held by the Superior Court of Quebec in the case of Cie Nationale Air France v Libyan Arab Airlines[1]. As such, there are restrictions to courts’ involvement in international arbitration.

    In essence, the Model Law allows for court intervention in certain instances to aid the process due to the court’s coercive powers which are absent for tribunals. These instances are detailed in Article 6 of the Model Law and can occur at the arbitration’s commencement, during proceedings, and after the arbitrator’s award.

    At the beginning of the arbitration, the court aids in enforcing the arbitration agreement, establishing the tribunal, and addressing challenges to its jurisdiction. The courts can be used to enforce arbitration agreements in Article 8(1) of the Model Law by refusing to accept proceedings in court in a matter which is the subject of an arbitration agreement and instead refer that matter to arbitration. Additionally, if there are no clear provisions for constituting the arbitral tribunal or applicable institutional rules, courts may appoint arbitrators as stipulated in Article 11(3) of the Model Law and this can be seen in the case of Montpellier Reinsurance Ltd v Manufacturers Property & Casualty Ltd[2]. While initial jurisdictional challenges may be handled by the tribunal, the final authority on tribunal jurisdiction lies with the courts as affirmed in Article 16(3) of the Model Law and as was held in the case of PT Tugu v Magma Nusantra Ltd[3].

    During the arbitration proceedings, courts can intervene in the issuance of interim relief to parties. Article 9 of the Model Law and Article 26(9) of the UNCITRAL Arbitration Rules (2021) (herein referred to as “the Rules”) provide that interim measures by the courts shall not be deemed to be incompatible with the arbitration agreement. These measures which are outlined in Article 17(2) of the Model Law aim to maintain the status quo and the integrity of the arbitration process. They include measures concerning witness attendance and documentary disclosure as provided in Article 27 of the Model Law. Importantly, these interim measures do not waive a party’s right to arbitration.

    At the end of the proceedings, courts enforce arbitration awards under Article 34(2) of the Model Law.

    The Ugandan Context

    In Uganda, arbitration is governed by the Arbitration and Conciliation Act 2000 (herein referred to as the “Act”). The Arbitration and Conciliation Act 2000 is a derivative of the Model Law. The central aim of the Model Law was to harmonize the laws concerning arbitration through the provision of an internationally agreed legal framework for the conduct of international commercial arbitration, with an emphasis on party autonomy and restriction of interference by the courts of the place of arbitration. As such, the Ugandan statute espouses these virtues that are central tenets to the arbitration process.

    Similar to the Model Law, the Act restricts court intervention in the arbitral process in section 9 save for the situations that it enumerates. The instances when courts can intervene in the arbitral process are at the commencement of the process, during proceedings and after the arbitrator renders the award to the dispute.

    At the beginning of the arbitration process, the court can protect the arbitration process from suffering a still birth by enforcing the arbitration agreement in section 5 of the Act. With this, court is able to refer a matter brought to it back to arbitration if the arbitration agreement between the parties is operable. Unlike the Model Law, the Act does not expressly mention the court as one of the remedies to parties that have failed to appoint an arbitral tribunal. The Act instead refers to an appointing authority in this case. Similar to the Model Law, the final authority on tribunal jurisdiction lies with the courts as illustrated by Section 16(6) and the court’s decision on the arbitrator’s jurisdiction shall be final and not subject to appeal as provided for by section 16(7) of the Act.

    During the arbitration proceedings, the court may grant interim measures of relief to parties in the arbitral process under section 5 of the Act. Contrary to the Model Law, the Act does not provide a breakdown of the different interim measures that parties can apply for from court. However, section 28 of the Act permits the courts to assist in the taking of evidence in a means to protect the status quo of the evidence.

    At the end of the Arbitral process, the courts can be used to recognize and enforce an arbitrator’s award under section 35 of the Act and also to set aside an award under section 34 of the Act.

    Conclusion

    Whereas there exists de minimis variations between the Act and the Model Law, both provide for limited court intervention in the arbitral process. The Act and Model Law provide for the courts to occupy a supervisory position and not meddle in the arbitration process thereby supporting the arbitration process to move from commencement stage to enforcement of the arbitrator’s award.

    [1] [2000] R.J.Q. 717 (Quebec S.Ct.).

    [2] [2008] SC (Bda) 27 Com (24 April 2008).

    [3] [2003] SGHC 204.

  • Reconciling Contractors’ liability under Occupiers’ Liability and their responsibility for Health and Safety on Construction Projects.

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    Charles Gavamukulya, MCIArb,AICCP

    Introduction

    Recently, Members of Parliament in Uganda were denied entry into a construction site of the Lubowa Specialized Hospital under the pretext that the Members of Parliament were visitors who did not have unfettered access to the construction site. This sparked debate across different platforms where the tax payers were struggling to understand why the MPs who play an oversight role for the government could not access a site of a public project. A number of key questions arose from this debacle: What informs the Contractor’s action of restricting visitors’ access to site? Does this affect a Contractor’s outlook towards Health and Safety protocols on the site?

    In trying to understand why visitors do not have unfettered access to construction sites, we need to understand the Contractor’s liability as an occupier under Occupiers’ Liability.

    Who is an occupier?

    An occupier is defined in the case of Wheat v E. Lacon &Co. Ltd as a person who exercises an element of control over premises. This control includes physical control of premises and legal control of premises as was established in Harris v Birkenhead Corporation. Often, it’s the case that after the commencement order, the Employer hands over the site to the Contractor. This is exhibited, for instance, in Subclause 2.1 of the 1999 FIDIC forms of Contract. It is also a common feature in the JCT forms of contract where the Employer is required to give possession of the site to the Contractor on the Date of possession which is stated in the Contract particulars. In London Borough of Hounslow v Twickenham Garden Developments, it was held that th Contractor was entitled to such possession, occupation or use as was necessary to enable it to perform the contract. The Contractor will then have possession of the site from the date of possession until the date of completion.

    Who, then is considered to be a visitor to premises?

    A visitor to premises (site) is considered in three categories, namely:

    • Those with express permission
    • Those with implied permission: Implied permission is also subject to limitations which, if exceeded, render the person a trespasser. In Harvey v Plymouth City Council, it was held that any implied permission to enter must be exercised properly.
    • Those with a right to enter: The law gives rights to entry to certain categories of people which render them within the definition of lawful visitors irrespective of the wishes of the occupier for instance police officers entering under warrant.

    A duty of care is owed by an occupier to the three categories of persons stated above. Visitors to the site therefore are duly covered under the Occupiers’ Liability Principle. The occupier’s duty is to ensure that the visitor is not injured while on the premises. This can be particularly highlighted for road projects that run over a long distance and are used by different visitors at different times of the day and night. The Contractor has a duty of care towards visitors in the three stated categories. As such, there has been a general shift in Contractors’ mindsets towards Health and Safety Protocols as most contractors have adopted to use preventive measures that will ensure safety for all visitors of the site/ premise. The same applies for building projects.

    Regarding the duty of care, although there is similarity with the standard of care in negligence, there is also an important distinction as an occupier is empowered by statute to determine the boundaries of his liability in section 2(1) Occupiers’ Liability Act 1957 in England and Wales for instance. Generally, since the occupier controls the extent of the permission to enter, a visitor who acts in a manner contrary to that permission becomes a trespasser. The issue of the trespasser will be dealt with below.

    Since children have access to sites sometimes and are largely considered to be less careful than adults, case law has sought to balance the responsibility between occupiers and parents as was seen in the case of Phipps v Rochester Corporation. Additionally, the level of care expected will depend upon the nature of the risk and the age and awareness of the child. In the case of Titchener v BRB it was held that no duty of care was owed to a 15-year-old boy who was struck by a train while walking on a railway line at night as he was aware of the dangers posed by his activity. A duty will exist if the land/premise holds concealed dangers or allurements that tempt children into danger as was seen in the case of Glasgow Corporation v Taylor.

    Use of Warning Signs

    Under the Occupiers’ Liability Principle, an occupier has a duty of care towards visitors and it may be satisfied if the occupier displays warning signs or cordons off areas that are dangerous. The following factors need to be taken into account when considering whether a warning sign was enough to enable the visitor to be reasonably safe:

    • A visitor should know what risk he is facing and therefore the warning has to be specific. As such, the Contractor could be liable where there is a deep excavation and he does not alert visitors to the site to it using a specific warning sign.
    • Hidden dangers necessitate greater efforts to call attention to them than readily apparent risks for instance as in the case of Staples v West Dorset District Council in the UK where it was held that risks posed by wet algae on a high wall were so obvious that there was no need for a warning sign. The Ugandan case of Gakumba v Mandela National Stadium Ltd also highlighted the fact that the defendant was liable due to absence of warning signs and security lights where there was an uncovered manhole.
    • Is the sign combined with other safety measures? The use of fencing or barriers emphasizes the need for safety.

    Who is a trespasser on a site?

    A trespasser is defined in the case of Robert Addie &Sons Ltd v Dumbreck as someone who goes in the premise without invitation of any sort and where presence is either unknown to the proprietor, of if known, is practically objected to. As such, it is true that in instances, a Contractor has limitations on who enters the premise(site). The key question then arises as to whether a Contractor bears liability on injuries to trespassers.

    The approach taken by the courts to determining liability towards trespassers can be seen in Young v Kent County Council. The issues of liability of injuries caused to child trespassers was further explored by Court of Appeal in Keown v Coventry Healthcare NHS Trust. Keown makes an important distinction between injury caused by the danger caused by the state of the building and the dangerous use of perfectly well-maintained premises. This was also seen in Tomlinson v Congleton where it was held that injuries arising from the claimant’s dangerous use of otherwise safe premises will not give rise to liability under the Occupiers’ Liability Principle.

    Conclusion

    The contractor, as an occupier, has a duty of care to keep visitors under different categories safe while they use the site. This can have lasting effect on the Contractor’s Health and Safety protocols as a way of dealing with this liability. Contractors are therefore encouraged to develop robust Health and Safety Protocols in order to keep workers and visitors safe while they use the site premises. Additionally, visitors are encouraged to act within the ambits of the set protocols and warning signs while accessing a construction site given the high risk of injury on construction sites.

  • Adjudication in Uganda: A critique of selected judgements from the Centre of Arbitration and Dispute Resolution (CADER).

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    Charles Gavamukulya, MCIArb,AICCP

    Introduction

    Adjudication is an Alternative Dispute Resolution (ADR) mechanism where an independent neutral third party makes a decision on a dispute between parties. The decision is temporarily binding. The adjudicator acts in an intermediate capacity on the spectrum between expert determination and arbitration. Adjudication is a common method of dispute resolution in the construction industry around the globe due to its benefits which include speed, flexibility, use of experts to resolve disputes, cost effectiveness and privacy. As such, it has also found a place in the construction industry in Uganda on public works however the uptake is still low in the private industry. This article will address the nature of adjudication in Uganda and offer a critique of selected judgements from CADER that seem to conflate adjudication and arbitration as the same ADR mechanism.

    Forms of Adjudication

    There are three forms of adjudication, namely: statutory, contractual and ad hoc. On the one hand, statutory adjudication is a form of adjudication in jurisdictions like England and Wales where there is an Act that applies to a contract between parties. The Act in this case is the Housing Grants, Construction and Regeneration Act (HGCRA) 1996 as amended by the Local Democracy, Economic Development and Construction Act (LDEDCA) 2009. When a contract falls within the description of a ‘construction contract’ in the Act, then a mandatory provision of dispute resolution by adjudication applies.

    Contractual adjudication, on the other hand, is a form of adjudication where an Act does not apply, but the parties have agreed a mechanism in their contract where they resolve disputes by adjudication. Lastly, Ad hoc adjudication refers to a form of adjudication where the parties have agreed to submit their dispute, without reservation, to adjudication, thereby giving an adjudicator impromptu jurisdiction to decide their dispute in circumstances where an Act does not apply and where there is no pre-existing contractual agreement to adjudicate. In Uganda, the most common forms of adjudication are contractual and ad hoc adjudication. Uganda does not have a statutory adjudication regime in place for the construction industry.

    Standard Form Contracts and Adjudication in Uganda

    Contractual adjudication in Uganda is common due to the proliferation of the use of Standard Form Contracts mostly on public projects and a few private projects. The common Standard Form Contracts in Uganda include the Public Procurement and Disposal Authority (PPDA) form of Contract, FIDIC forms of contract and the East Africa Institute of Architects form of contract which is usually used on building projects in the private industry.

    It is critical to note that there must be a dispute in order for the adjudication process to become operable. Courts have held in the case of AMEC Civil Engineering Ltd v Secretary of State for Transport [2004] EWHC 2339 that the word dispute should be given its normal meaning and there is no special meaning ascribed to it. A dispute crystallizes when a claim made by one party is either accepted, modified or rejected by the other party as was held in the case of Fastrack v Morrison [2000] 75 ConLR 33.

    The Adjudication process in the PPDA forms of Contract which are often used on public works has come under scrutiny in a number of cases at the Centre of Arbitration and Dispute Resolution (CADER) severally. CADER was established in the Arbitration and Conciliation Act 2000 in section 68 with a role of performing administrative procedures for Alternative Dispute Resolution processes which were mainly considered to be arbitration and conciliation. It was often the institution of choice for parties in appointment of adjudicators.

    Selected Cases at CADER

    Reference is made to the selected cases of Board of Governors, John Paul S.S Chelekura v Kheny Technical Services Ltd, China Jiangxi Corporation for International Economic and Technical Corporation v Cotton Development Organization, Namabale Enterprises Ltd v Busitema University and Plinth Technical Works Ltd v Hoima Municipal Local Government Council where the parties wrote to CADER requesting for the appointment of an adjudicator. All these cases had a similar dispute resolution clause which was adopted from the clause in the PPDA form of contract. The clause is replicated here for ease of reference:

    “24. Disputes

    24.1 If the contractor believes that a decision taken by the Project Manager was either outside the authority given to the Project Manager by the Contract or that the decision was wrongly taken, the decision shall be referred to any Adjudicator appointed under the contract within 14 days of the notification of the Project Manager’s decision.“

    The clause further reads that:

    “25. Procedure for Disputes

    25.1 Unless otherwise specified in the SCC, the procedure for disputes shall be as specified in GCC 25.2 to 25.4.

    25.2 Any Adjudicator appointed under the contract shall give a decision in writing within 28 days of receipt of a notification of a dispute, providing that he is in receipt of all the information required to give a decision.

    25.3 Any adjudicator appointed under the contract shall be paid by the hour at the rate specified in the SCC, together with reimbursable expenses of the types specified in the SCC, and the cost shall be divided equally between the Employer and the Contract, whatever decision is reached by the Adjudicator. Either party may refer a decision of the Adjudicator to an Arbitrator within 28 days of the Adjudicator’s written decision. If neither party refers the dispute to arbitration within the above 28 days, the Adjudicator’s decision will be final and binding.

    25.4 Any arbitration shall be conducted in accordance with the arbitration law of Uganda, or such other formal mechanism specified in the SCC, and in the place shown in the SCC.“

    In this case, the SCC stands for Specific Conditions of Contract. The SCC provided for the procedure for disputes to be as specified in the GCC 25.2 to 25.4 which are shown above and then provided for the Centre of Arbitration and Dispute Resolution to be the appointing authority for the Adjudicator.

    It should also be noted that the Contract defined an adjudicator as:

    “1.1 (b) The ‘Adjudicator’ is the person appointed jointly by the Employer and Contractor to resolve disputes in the first instance.” (Emphasis added)

    In the construction of this clause, the Executive Director of CADER stated that the definition of an adjudicator is synonymous with the function of the arbitration agreement set out in s.2(1)(e) Arbitration and Conciliation Act, Cap 4 which is replicated here for ease of reference:

    “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of defined legal relationship, whether contractual or not.”

    The Executive Director further proceeded to state that “there is no provision in the ACA, which restricts the definition of an arbitrator.” (Emphasis added)

    He then adds that “I accordingly exercise the powers vested by S.11(4) ACA to appoint an adjudicator.” (Emphasis added)

    This was a consistent construction of the clauses and conclusion in decision across all of these selected cases.

    A Critique of these decisions

    It can be noted that there is a conflation of arbitration and adjudication which are different dispute resolution mechanisms. It is true that the parties chose CADER as an adjudicator nominating body basing on the fact that CADER was in place to administer this function, but this does not in any way call for the use of the definition of an arbitrator in the construction of the clause. CADER ‘s role in this case was to appoint an adjudicator and not an arbitrator.

    It should be noted that the parties had already defined who an adjudicator was in their contract and that the adjudicator had jurisdiction on disputes in the first instance. It can also be interpreted that there are two instances that the adjudicator would be called into action and that is when one of the parties was dissatisfied with the Project Manager’s decision but also when any other dispute crystallized between the parties as guided by the procedure for disputes in the SCC which was referenced above.

    The arbitrator would only be called into action when one of the parties is dissatisfied with the adjudicator’s decision. Whereas the Executive Director mentioned that there is no provision in the Arbitration and Conciliation Act that restricted the definition of an arbitrator, it is also true that an arbitrator and an adjudicator serve roles which may be different and have outcomes that have differing degrees of finality. An adjudicator’s decision is temporarily binding while the arbitrator’s award is final and binding. Therefore, it can be seen that an arbitrator and an adjudicator are not one and the same.

    Reference to an arbitration agreement is also faulty since in this case the parties were requesting for the appointment of an adjudicator for which they already had a pre-existing contractual mechanism to carry out that appointment and an Adjudicator Nominating Body named to do this. This contractual adjudication provision should not have been conflated with the arbitration agreement.

    In conclusion, adjudication and arbitration are two different procedures on the ADR continuum and therefore should not be conflated to mean one and the same. As such, it would not be correct to appoint an adjudicator using a section in the Arbitration and Conciliation Act in a country like Uganda with no statutory regime governing adjudication in the construction industry. This is critical in a situation where there is a provision for contractual adjudication between parties. The Arbitration and Conciliation Act 2000 governs arbitration and conciliation in Uganda and does not provide a similar legal framework as the HGCRA 1996 does in England and Wales. In any case, England and Wales have HGCRA 1996 to govern mandatory statutory adjudication and the Arbitration Act 1996 to govern arbitration.

  • Variations in Construction Contracts

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    Charles Gavamukulya, MCIArb,AICCP

    Introduction

    Variations -often referred to as changes- provide the biggest headaches to the Contract Administrator, who is also referred to as the Architect, Project Manager or Engineer, on construction projects. The 2022 King’s College London Report on the Construction Industry pointed out one of the leading causes of disputes as changes (variations) by the client. Change or variation is inevitable and often required on construction projects because of a number of reasons which include incomplete designs, new technology and materials plus changes in client and end user requirements. What also stands out is the fact that the Works are often unique since there is no prototype built for most construction projects. The Works being undertaken form the prototype and final product and therefore there is a high probability that changes will be effected in order to obtain the project goals.

    Why should construction contracts allow variations?

    The common law position is that parties have to do what they contracted to do-no more and no less. As such, without a provision for variations built into the contract, no change would be permitted. The Contractor would not be able to execute the Variations since they lie beyond what he contracted to do. This can be counterproductive to achieving project progress or completion where Works which are part of a variation are key to progress or completion. In order to cure this, a variation clause allowing unilateral change by the Contract Administrator allows the changes to become part of what the parties contracted to do.

    In case of a contract where the Employer is in charge of design, the Contractor may have a case in misrepresentation against the Employer who claims that a project is fully designed when it is not as was the case in Howard Marine v Ogden & Sons [1]. The provision allowing for variations deals with this liability.

    How can change be made in construction contracts?

    Change must be made by agreement which could either be by a further agreement between the parties with new consideration or by express agreement in the original contract. Express agreement in the original contract can be seen in JCT SBC/Q 16 in clause 5 supported by clauses 3.14, 2.29 and 4.22. In NEC 4, it is stipulated in clauses 14.1, 18.1,45 and 63.10-11 while in the 1999 FIDIC forms of contract, variations are primarily governed by Sub-Clauses 13.1 to 13.3.

    In making a change by further agreement, the parties need to be clear whether what they are attempting to do is one of the following scenarios, namely:

    1. Revising the terms of an existing contract which constitutes a variation.
    2. Agreeing to a new and additional contract which would lead to the formation of a collateral contract.
    3. Replacing the original contract with a new one which would constitute a rescission of the contract.

    Change by further agreement cannot be brought about by undue pressure as that would lead to voiding of the new contract. This was seen in the case of D&C Builders v Rees [2].

    Change made by express agreement in the original contract means that the Contractor has already agreed to comply with the variations that fall within the ambit of the variation clause. As such, failure to comply with an instruction requiring a variation may amount to a breach of contract by the Contractor. This is subject to the caveat that the Contractor is not obliged to comply with any variation order which is outside the ambit of the variation clause.

    In order for a contractual variation instruction to be valid, it must:

    1. Be within the ambit of the variation clause and bear some relationship to the Works. As such, the Contract Administration must hinge on the Variation clause while giving such an instruction.
    2. Be additional to the original contractual obligation. With this, works that are part of the original scope cannot consist of a variation.
    3. Be issued by an authorized person. Variations have to be issued by the prescribed authority who is normally named in the Contract.
    4. Be issued in the prescribed manner within the Contract. As such, an instruction may be rendered null if it were issued without following the process which is set out in the Contract.

    How do you determine whether an instruction amounts to a Variation?

    Determination of whether work amounts to a change is a matter for construction in each contract as was the case in Williams v Fitzmaurice[3] and Sharpe v San Paulo Railway[4]. In order to decide whether a certain instruction amounts to a change, a benchmark is needed against which the change can be judged. This benchmark is established by reference to the original bargain or agreement between the parties. In the case of Chittick v Taylor[5], it was held that items provided for in the contract cannot be extra. It was also held that when a Contractor provides material of a better quality that that required under the Contract without express or implied instruction from the Contract Administrator, the Contractor is not entitled to charge the additional cost. However, if the Contractor carries out work or supplies materials that are not called for under the contract basing on an instruction from the Contract Administrator, the Contractor is entitled to additional costs.

    It is also important to remember that on a design and build contract where the Contractor is in charge of design, if there is a need to amend the design, the Contractor will be obliged to remedy that at no additional cost to the Employer as was the case in Davy Offshore v Emerald Field Contracting[6].

    Conclusion

    Variations are one of the leading causes of disputes on construction contracts. In order for a variation to be properly executed, there is a need to follow the due process that was set out in the Contract and also to correctly identify if indeed a change has been applied in those circumstances. Valuation of the variations has to be properly done and where applicable an Extension of Time awarded in order for the Variations to be completed.

    [1] [1978] Q.B. 574.

    [2] [1966] 2 Q.B. 617.

    [3] [1858] 11 WLUK 131.

    [4] [1873] 4 WLUK 19.

    [5] [1954]

    [6] [1992] 3WLUK 69.

  • Appraisal of a Contractor’s Tortious Liability under civil jurisdictions: A case study of France.

    ·

    Charles Gavamukulya, MCIArb,AICCP

    Following the outlook into common law on the appraisal of a Contractor’s tortious liability under the tort of negligence in the previous article which can be found here: https://blog.cg.co.ug/appraising-contractors-tortious-liability-under-the-tort-of-negligence/ ,it is important to contrast that with civil jurisdictions like France, Germany or Saudi Arabia among others.

    How different would the Contractors tortious liability be under a civil jurisdiction?

    In this article, while considering how the issue might have been differently addressed in a Civil Code Country, reference is made to the French Civil Code. The structure of French tort law is such that it does not spell out the different torts like negligence, trespass and nuisance but rather provides for them generally in Articles 1240 to 1245 of the Civil Code. There is no limitation on the type of wrong which may arise under these articles since they are drafted to be very wide.

    Article 1245-8 provides that the claimant must demonstrate the harm, the defect and the causal relationship between the defect and the harm. These constitute the three elements of the claimant’s burden of proof in order to prove liability. Therefore, there is no need for a duty of care as would have been required by common law. Additionally, there is no need of application of the neighbour principle under French law. The claimant needs to prove the defect and the damages that he is pursuing. The French Civil code does not show how this link between defect and harm should be assessed but it must be direct causal link between the harm and the defect.

    Based on this, using an example of an Employer on a building project that has suffered structural failure due to defects in construction and (or) design, the Employer could prove that the defect in the construction and (or)design of the Works caused failure of the structure and the Contractor would be liable under French law. Once the claimants (the Employers in this case) ably prove fault, damage and the causal link between the fault and the damage, they can win all their compensation.

    Article 1241 provides that an individual is responsible for harm caused not only by their actions but also by their failure to act or exercise due care. This provision allows one to be liable for one’s omissions which is a departure from common law where in Stovin v Wise[1] it was held that the law does not recognize a duty of care owed to the whole world to take positive action to prevent harm. In Caparo v Dickman[2] terms, imposing such a general duty would be unfair, unjust or unreasonable. Referring to the instant facts, a Contractor would be liable to an Employer for actions that led to structural failure. Additionally, a Contractor would be liable to an Employer due to their inaction or lack of care in ensuring that the structure that was handed over was not under designed and improperly constructed.

    Article 1242 provides that one is not only liable for the harm resulting from one’s actions but also for harm caused by the actions of those for whom they are responsible or by things under their care. From this, where a contractor has subcontractors on site, it can be considered that the Contractor is responsible for the Subcontractor’s actions. The Contractor would be open to multiple fronts of liability as a result depending on the different parties that are affected by the different subcontractor’s actions.

    Article 1244 provides that a building owner, referred to as the Employer in this article, is liable for the harm caused by its collapse when that resulted from a lack of maintenance or construction defect. This indicates that liability arises from lack of maintenance or construction defects even when the owner of the building is not responsible for the cause of the defects. This is a departure from common law where a Contractor would instead be liable under public nuisance.

    In conclusion, in addition to the liabilities of the respective parties already established under common law, French law imposes an additional liability to an Employer where the Employer would be liable to parties that suffer due to the defective building that it owns. The burden of proof required from the claimants differs from that under common law given that the claimants now must fulfil the burden of proof in Article 1245-8. Additionally, Contractors could be open to multiple fronts of liability due to actions of their subcontractors.

    [1] [1996] AC 923 (HL).

    [2] [1990] 2 A.C. 605.

  • Appraising Contractors’ tortious liability under the tort of negligence.

    ·

    Charles Gavamukulya, MCIArb,AICCP

    Introduction

    In the recent consolidated cases of Paul and another v Royal Wolverhampton NHS Trust, Polmear and another v Royal Cornwall Hospitals NHS Trust and Purchase v Ahmed, the Supreme Court of the UK has held that a Contractor owes a duty of care to an Employer in relation to building defects-arising from design, construction or both. This type of duty is usually parallel to a contractual duty that the contractor will perform its works with due skill and care. The existence of this parallel duty of care may be vital in cases where limitation periods are concerned. As such, even when defects occur almost six years after the completion date which would ordinarily be statute barred under claims in contract in the UK and in Uganda, claims in tort can be brought forward. This was established in the case of Dutton v Bognor Regis UDC where claims that were previously time barred by limitation were allowed.

    However, it should be noted that claims in tort for negligence, negligent advice or negligent misrepresentation are open for some standard forms of contract, for instance the FIDIC forms of contract where Sub-clause 20.4 of the 1999 FIDIC forms of contract allows for disputes in connection with or arising out of the Contract or the execution of the Works. Ashville Investments v Elmer Contractors Ltd is authority for the proposition that a clause which covers disputes arising under the contract but also includes the words ‘in connection with’ should be given a wide interpretation and will cover related claims for rectification, negligent misstatement, and the like.

    The Negligence Equation

    For a successful claim in the tort of negligence, the claimant-often the Employer, must show: (1) that the Contractor owed them a duty of care; (2) that there was a breach of that duty; and (3) this breach resulted in recoverable damage. It is important for all these components of this negligence equation to be satisfied in order for such a claim to succeed.

    While considering the first limb of this negligence equation, we consider the leading case of Donoghue v Stevenson where it was held that a manufacturer of goods owed a duty of care to their final consumer. This case established the ‘neighbour principle’ which determines whether a duty of care is owed by the defendant in any given situation. In his obiter, Lord Atkin defined a neighbour in the law as a “person who is so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question.” Consequently, the requirements of foreseeability and proximity set out in the neighbour principle form the basis of finding duty of care. The fundamental concept of the neighbour principle underwent reformulation in Caparo Industries v Dickman. In this case, there was introduction of the consideration of whether the existence of a duty would be fair, just and reasonable. With this, Caparo introduced a third requirement that extended beyond the two earlier criteria that were set by Donoghue.

    In the appraisal of negligence, it is important to examine both negligent actions and negligent advice. Appraising negligent advice has particular application on design and build projects. When determining the duty of care for negligent misstatements, reference is made to the case of Hedley Byrne v Heller where it was held that a duty of care could exist concerning a statement leading to pure economic loss, if the parties were in a ‘special relationship’. Such a special relationship arises, in part, when one party exercises skill and judgement and the other party acts in reliance of this skill and judgement.

    Given that the Contractor is a neighbor to the Employer, the Contractor often owes the Employer a duty of care for both negligent acts and negligent advice in some cases.

    Breach of Duty

    After confirming the existence of a duty of care, the next step in proving negligence involves demonstrating a breach of that duty. To ascertain breach of duty of care, it is necessary first to identify the standard of care and then determine if this standard was met in the given circumstances. The standard of care, as established in Blyth v Birmingham Waterworks, is that of the ‘reasonable man’. This is a legal abstraction which represents an average person who was further described by Greer LJ in Hall v Brooklands Auto-Racing Club as ‘a man on the Clapham omnibus.’

    However, if the defendant presents themselves as possessing specific professional skills, the applicable standard of care must be determined by comparing them with others in the same profession. In Bolam v Friern Hospital Management Committee, it was held that the ‘test is the standard of the ordinary skilled man exercising and professing to have that special skill. For the context of a Contractor on a project, the Contractor holds themselves out to the Employer as possessing particular professional skills to execute a design and build project or simply a build project and therefore this is the standard of care to which they must adhere.

    The legal burden to prove breach of duty is on the Employer in this case and this must be established on the balance of probabilities. The Employer can rely on the maxim of res ipsa loquitur. With this, in the absence of convincing evidence to the contrary, the court will give the Employer the benefit of doubt by inferring negligence from what is known. This was shown in Scott v London & St. Katherine Docks where it was held that a claimant will be assisted by res ipsa loquitur if the thing causing damage is under the control of the defendant or someone for whose negligence the defendant is responsible, and that the accident is such as would not normally occur without negligence.

    When examining a Contractor’s liability to the Employer, further reference is made to Gee v Metropolitan Railway Co where the train doors were presumed to have been the sole responsibility of the train company and therefore it was liable. Where structural failure/defects are due to design and construction solely done by Contractor, and without any evidence to the contrary, the Employer can be assisted by the maxim of res ipsa loquitur. As such, where the standard of care is not reached in the respective duty stations, it can be said that there is a breach of duty.

    Did the breach of Duty result in loss?

    After establishing that there was breach of duty, the next key question would be whether or not the breach of duty resulted in loss. The general test used by the courts to determine the factual causation is the “but for” test, where the key question is whether, but for the defendant’s breach of duty, the loss or damage would have occurred. For instance, Lord Denning stated in Cork v Kirby Maclean Ltd that “…if the damage would not have happened but for a particular fault, then that fault is the cause of the damage; if it would have happened just the same, fault or no fault, the fault is not the cause of the damage.”

    The two types of damage under consideration are physical damage and pure economic loss. In Spartan Steel v Martin, it was held that financial loss not directly stemming from physical damage is too remote to be compensable in negligence. As such, the law of negligence concerns actual damage, usually in the form of physical injury to persons or property.

    The courts have adopted different approaches to pure economic loss resulting from a negligent action and pure economic loss caused by negligent advice. This can be shown in Murphy v Brentwood where it was held that the loss described as physical damage due to the negligent act was in fact pure economic loss and was not recoverable. As such, pure economic loss arising from a negligent act is not recoverable. As such, Employers cannot claim for pure economic loss resulting from Contractor’s negligent acts.

    In the case of Henderson v Merrett, it was held that when one party undertakes to provide professional or quasi- professional services for another, this commitment, if relied upon by the person on whose behalf these services are performed, may be adequate to establish a duty of care in tort, irrespective of the contractual relationship between the parties. According to Henderson, the existence of contractual relationships between the parties did not exclude the possibility of a duty of care in negligence. Moreover, the special relationship extended beyond advice to also include the provision of services.

    In Hedley Byrne, it was held that a duty of care could exist concerning a statement leading to pure economic loss if the parties were in a special relationship such as that one discussed above in Henderson. In contrast to pure economic loss arising from a negligent act, pure economic loss arising from negligent advice is recoverable. Consider a design and build project where the Contractor recommends the use of a wall of contiguous piles which is later discovered to have been under-designed for their length and load bearing requirements. It can be considered that the Contractor provided negligent advice to the Employer thereby entitling the Employer to claim for pure economic loss resulting from this negligent advice.

    Damage suffered.

    The final limb of the negligence equation involves determining the extent of the damage suffered by the claimant which should be attributable to the defendant. In the Wagon Mound (No.1) case, it was held that the appropriate test for remoteness is reasonable foreseeability of the kind or type of damage suffered by the claimant. Applying the Wagon Mound test in Hughes v Lord Advocate, it was held that it is only the type of damage which must be reasonably foreseeable and not the manner in which it occurs or its extent.  Where there is physical damage due to a breach of duty of care and it is reasonably foreseeable that the Employer would suffer this loss as a result of the Contractor’s negligence, this limb which is essential in proving negligence is satisfied.

    Conclusion

    In conclusion, Contractors can be liable to Employers for negligent acts and negligent advice. As such, Contractors have to be aware of these liabilities which may not necessarily be “under the contract” and with which claims can be forwarded beyond the limitation period.

  • Drafting of Effective Arbitration Clauses

    ·

    Charles Gavamukulya, MCIArb,AICCP

    Introduction

    A recent judgement delivered on 23 February 2023 in the High Court of Uganda in a case between The Attorney General of the Republic of Uganda (Applicant) v Networth Consult Co. Limited (Respondent) went to the heart of discussing the nature of an arbitration agreement and what constitutes a pathological clause. As a result, this drives a conversation towards the drafting of effective arbitration clauses.

    Dispute resolution clauses are often time referred to as “midnight/ champagne clauses”. This is because once the rest of the contract has been agreed upon, the parties are quick to celebrate and the dispute resolution clause becomes an afterthought, or a matter of “copy and paste” which more often than not results into unclear, incomplete, or contradictory clauses. The parties, often time, agree not to have a dispute resolution clause because there is an anticipation at the start of the performance of the contract that there will not be dispute and if it occurs, there is a general feeling that the parties will always have an amicable settlement. This is always not the case as parties can disagree on legal or technical aspects of the contract and at such a time, the good will and good faith that existed at the agreeing of the contract does not exist anymore. The need for a clear clause to highlight the parties’ consent to settle their dispute under alternative dispute resolution cannot be overly emphasized.

    The Case

    The Respondent filed Civil Suit 541 of 2022 [“main suit”] against the Applicant for breach of a consultancy contract and recovery of sums stated to be payable under that contract. The Applicant brought an application to the court, contending that the dispute between the parties was amenable to arbitration. Accordingly, the Applicant  contended that the Respondent’s suit was barred by law.

    The Applicant asserted that the parties had a binding and enforceable arbitration agreement and that as a result, the Respondent’s suit should be dismissed, and the matter referred to arbitration. The Applicant contended that there was a valid arbitration agreement to submit all disputes arising from the contract  exclusively to arbitration. On the other hand, the Respondent contended that reference to arbitration was optional.

    The Clause in dispute was Clause 45.1 of the Contract between the parties which reads as below.

    “Any dispute between the parties arising under or related to this contract that cannot be settled amicably may be referred by either party to the adjudication/arbitration in accordance with the provisions specified in the SCC.”  SCC in this case is an abbreviation for Special Conditions of Contract.

    The special conditions at Clause 45.1 then proceed to spell out an elaborate set of rules and procedures for arbitration of disputes arising from the agreement.

    The Judgement

    The Judge in this case noted that he was aware of an ADR process called “Adjudication”. Furthermore, he noted that this process was most common in construction contracts but may exist in other contracts. This process  involves the submission of a dispute to an expert who makes a determination often on technical grounds. Adjudication clauses typically have rules indicating how an adjudicator may be appointed and how adjudication may be undertaken. In this case, the contract was not a construction contract and therefore the learned judge concluded that the word “adjudication” was intended to refer to litigation since “The parties could not have intended to have adjudication (as an alternative dispute resolution) as well as an arbitration before an expert arbitrator as this would have achieved the same thing. Still, there is nothing in the agreement that points to an agreement to undergo adjudication as an alternative dispute resolution process.”

    It is from this that he tackled a clause that provides for both litigation and arbitration. In ISC Holding AG v Nobel Biocare Investments N.V 351 Fed. Appx. 480, the US Court of Appeals held that an arbitration clause must exclude the involvement of state 15 courts (save for interim reliefs and/or recognition and execution) and an agreement that did not exclude them was ambiguous and therefore incapable of being enforced. In X Holding AG and Ors v Y Investments NV 4A_279/2010 where a similar clause was involved, a Swiss Court held that an agreement that does not clearly 20 exclude state courts is ambiguous as it does not reveal a clear intention to arbitrate.

    The court also considered whether the use of the phrase “may” was optional. In Meshack Kibunja Kaburi & 3 others v Kirubi Kamau & 5 others; Central Highlands Tea Company Limited (Interested Party) [2021] eKLR the court, considering a clause that provided that a dispute may be referred to arbitration, held that there was a clear intention to refer the matter to arbitration and thus the same had to be undertaken notwithstanding the use of the word “may”.

    Another question was whether in this case, the plaintiff was obliged to submit to the arbitration proceedings initiated by the applicant from this clause. The Judge ruled that from reading the parties’ contract in full, “it appears from the contract that the initiating party is at liberty to decide how to initiate the dispute. Once they had made their election, the other party was obligated to defend or counterclaim in the forum in which the proceedings had been began.”

     He further added that “ in cases of this nature, the initiating party has the election  to determine which mode to commence in, and the other party has to defend in that forum. However, this does not mean that if another dispute arises, it should go to, say, court simply because a previous dispute went to court. The right of election exists in each case.”

    As such, it was not mandatory for the parties to go for arbitration as the clause had been constructed in such a way that the arbitration was another option to litigation in case a dispute arose. The Judge also noted that “This is obviously a little bit disorganized and a clear clause that provided for one 30 mode of dispute resolution would have been a lot more preferable.”

    In that case, the arbitration agreement between the parties was incapable of being performed within the meaning of Section 5(1)(a) of the Arbitration and Conciliation Act as the Respondent had already elected to commence proceedings before the court. As such, the dispute was no longer amenable to arbitration.

    Discussion

    1. What if a deviation from the Judge’s consideration of Adjudication was taken?

    The Judge considered adjudication in this case to mean litigation and as such, it opened up the discussion towards having both arbitration and litigation in a dispute resolution clause. If adjudication was taken for its traditional meaning in construction contracts, however, then my belief is that the judgement would have read differently. Adjudication ,as the learned judge has already alluded ,is an established process along the ADR spectrum normally based on technical aspects like the case in context here. The decision from the adjudicator is a temporary binding decision as it can be overturned by the Arbitrator’s award. The Adjudicator’s decision is made within 28 days. It serves as a quick, flexible, and informal way to solve disputes between parties. In this case, the parties could have elected to either pursue Arbitration or Adjudication as read from the clean text of the clause or could have carried out the Adjudication as a condition precedent to the Arbitration. That approach would have led to a different judgment and different considerations altogether.

    • What are the hallmarks of an effective arbitration clause ?

    Ideally an arbitration agreement will enable the parties to choose the :

    • Composition of the tribunal
    • Language of the arbitration
    • Rules by which the arbitration will be conducted
    • Institution, if any, which will regulate and administer the arbitral process
    • Jurisdiction which will govern the procedural issues in the arbitration
    • Jurisdiction which will govern the merits of the dispute or issues between the parties.

    Like any other contract, not all arbitration agreements are perfectly crafted. There will be defects sometimes whether by human error or because of lack of proper advice. There are certain characteristics which need to be satisfied for there to be an effective arbitration clause and failure to do so results into what is commonly known as a “pathological clause”. A pathological clause is one, which fails to cover the disputes the parties want arbitrated, fails to identify the appropriate “seat” for the arbitration or identifies an inappropriate seat, or fails to identify the correct set of rules or the correct institution to administer those rules. One can argue that for an arbitration clause to be effective, it is necessary that the agreement for the parties to solve disputes by arbitration and not court, should be clear and unequivocal.

    Conclusion

    The existence of a valid agreement to arbitrate has several important consequences for the resolution of a dispute. If there is a valid arbitration agreement, the parties will be compelled to resolve their dispute through the arbitral process thereby keeping the dispute out of the national courts. A party who seeks to initiate a claim in the national courts despite the existence of an arbitration agreement will likely be restrained by the court upon application by the opposing party to stay the court proceeds in favor of arbitration. In this case’s context, the judgement was to the effect that the Applicant filed an application for this restraint. However, the arbitration clause was not effective enough and as such the Applicant’s application was dismissed. This case and the subsequent judgement highlight the importance of drafting of effective dispute resolution clauses.

  • CONSIDERATIONS REGARDING DELAY ANALYSIS ARISING FROM THOMAS BARNES & SONS PLC V BLACKBURN WITH DARWEN BOROUGH COUNCIL

    ·

    Charles Gavamukulya, MCIArb,AICCP

    Delay Analysis is a contentious issue in claims arising out of construction projects. Often time, there is an argument over the correct or more correct analysis method for delay analysis. The Society of Construction Law Delay and Disruption Protocol (‘SCL Protocol’) sets out the following differing methods of delay analysis that can be used to analyze the impact of a delay event to the critical path of a construction program:

    Delay Analysis Methods as set out in The Society of Construction Law Delay and Disruption Protocol

    On 17 October 2022, the High Court handed down its decision in Thomas Barnes & Sons plc v Blackburn with Darwen Borough Council [2022] EWHC 2598 (TCC), which related to the construction of a bus station in Blackburn.

    The claimant, Thomas Barnes & Sons plc (in administration) (‘Thomas Barnes’) was the contractor employed by a local Council, with the project suffering significant costs increases and delay.  The Council purported to terminate Thomas Barnes’ contract and engage another contractor to complete the works.  Soon after, Thomas Barnes went into administration, with the administrators subsequently seeking approximately £1.7 million in damages.  This included an entitlement to prolongation and delay-related damages, which led the Judge to provide some discussion on the differing forms of expert delay analysis relied on by the parties.

    In Thomas Barnes, the Judge noted that it would be wrong to place too much importance as to whether a particular method of delay analysis had been strictly followed, stating that:

    ‘The SCL Protocol itself discourages such an approach.  It states in the introduction that:

    (a) its objective is to provide useful guidance.

    (b) it is not intended to be a contract document nor to be a statement of the law;

    (c) its aim is to be consistent with good practice rather than to be a benchmark of best practice; and

    (d) its recommendations should be applied with common sense.  It states under paragraph 11.2 that “irrespective of which method of delay analysis is deployed, there is an overriding objective of ensuring that the conclusions derived from that analysis are sound from a commonsense perspective”.

    Thus, it would be wrong to proceed on the basis that, because the SCL Protocol identifies six commonly used methods of delay analysis, an expert is only allowed to choose one such method and any deviation from that stated approach renders their opinion fundamentally unreliable.  It must be borne in mind that the common objective of each is to enable the assessment of the impact of any delay to practical completion caused by particular items on the critical path to completion.  However, I do accept that if an expert selects a method which is manifestly inappropriate for the particular case or deviates materially from the method which he has said he is following, without providing any, or any proper, explanation, that can be a material consideration in deciding how much weight to place on the opinions expressed by the expert.’

    Especially when part of the claim centres around an extension of time, expert delay analysis is commonly relied on in both adjudication or litigation to prove or disprove a claim.  In light of the Judge’s comments in Thomas Barnes, it is not a requirement for a particular method to be strictly followed.  However, delay experts should be conscious of the impact that a deviation from the stated method used or the use of an inappropriate method will have on the weight of their evidence without a reasonable explanation

    Other observations from Thomas Barnes

    Traditional approaches to the main cause of delay have been the ‘dominant cause’ approach, focusing on the main cause of the delay, or alternatively, the ‘first in time’ approach, focusing on the event that occurs first. However, the Judge found that concurrent delays had occurred, even though there appeared to be a dominant delay, separate to one that occurred first. In this instance, the Judge made a finding that ‘depending upon the precise wording of the contract a contractor is probably entitled to an extension of time if the event relied upon was an effective cause of delay even if there was another concurrent cause of the same delay in respect of which the contractor was contractually responsible’. However, the Judge noted that despite being entitled to an extension of time for a dominant cause delay, the Contractor would not be entitled to costs for loss and expense where a separate concurrent delay occurred for which the contractor was contractually responsible.

  • Price escalation in construction contracts under FIDIC 

    ·

    Charles Gavamukulya, MCIArb,AICCP

    Introduction

    As the cost of materials, transportation and labor rise globally, construction projects are feeling the bite of evaporating margins, constrained cashflow, and extended lead times. Moving into a post-COVID operational environment, after a long (and continuing) period of reconciliation regarding COVID costs and delays, price escalation is becoming an urgent issue for global construction.

    On top of COVID-driven inflation and delays, the commercial fallout of the conflict in Ukraine forced global supply chains and financing arrangements to adapt almost overnight, with an immediate impact on price-influencing fundamentals such as energy, iron/steel and other base metals. Unnervingly, a potentially similar economic shock could evolve from the increasingly tense international relations between China and Taiwan.

    In this context, contractors and subcontractors are not only looking for ways to manage cost increases under existing contracts, but also becoming aware that if their future contracts do not provide for the risk of price escalation in the coming years, it could lead to further problems.

    What is ‘price escalation’?

    Price escalation is sometimes known as ‘cost escalation’ or ‘material price escalation’. It refers to the sensitivity of construction contracts to the prices of materials and labour. In any fixed-price contract, the impact of rising costs in the supply chain will have a direct consequential impact on a contractor’s margin and cashflow. Under variable-price contracts, these are passed on to the Employer, with similar effects.

    It is unusual to see variable pricing in major international projects, in part because such projects are typically dependent on financing from institutions. Often these institutions mandate the contractual arrangements on projects they finance but, even if not the case, project finance is generally based on detailed risk assessments that view open-ended, uncertain cost structures unfavourably.

    New ‘target cost’ contracts are hybridising these contract models to an extent, essentially by providing a cost-reimbursable structure subject to a cap. Although these arrangements are enjoying some success in smaller domestic projects, it remains to be seen whether such arrangements will be used internationally.

    As a result, all contract models are impacted by price escalation, but it is often contractors that bear the brunt.

    Types of contracts  

    The type of contract usually informs as to which party takes the risk of price fluctuations. In reimbursable or cost-plus contracts, the employer takes the risk. The contractor is reimbursed the actual cost, plus allowances for overheads and profit. If the contractor’s actual costs increase, the contract price will increase also. 

    In remeasurement contracts and fixed price/lump sum contracts the contractor usually takes the risk unless there is a mechanism for cost adjustment.  In remeasurement contracts (such as the FIDIC Red Book – For Building and Engineering Works Designed by the Employer) the contract price is based on approximate quantities and a schedule of rates and prices. But, if the rates and prices can be adjusted where price fluctuations occur, the contract price is recalculated using the new rates and prices and the final agreed quantities. The actual work done is remeasured when the works are completed. In fixed price/lump sum contracts (such as the FIDIC Yellow Book – Plant and Design Build) the contractor provides an overall figure, ‘a lump sum’, for all the works that are agreed to be carried out under the contract. But, if the amounts due to the contractor can be adjusted where price fluctuations occur, the contract price is recalculated

    Escalation clauses 

    A mechanism for cost adjustment is, potentially, a more reliable way to limit the contractor’s risk.  In the FIDIC 1999 editions the escalation clause is at Sub-Clause 13.8, and in the FIDIC 2017 editions it is at Sub-Clause 13.7. Sometimes the escalation clause is deleted or modified. Sub-Clause 13.8 of the FIDIC 1999 editions (or Subclause 13.7 in the FIDIC 2017 editions) is an ‘opt-in’ clause. It applies only if:

    1. Under the FIDIC Red and Yellow Books 1999 – a table of adjustment data is included in the Appendix to Tender.

    2. Under the FIDIC Silver Book 1999 – provided for in the Particular Conditions.

    3. Under the FIDIC 2017 forms – a Schedule(s) of cost indexation is included in the contract.

    The table of adjustment data or Schedule(s) is a complete statement of the adjustments to be made to the cost of labor, goods and other inputs to the Works (for example, fuel). Any other rises or falls in the Costs are deemed to be included within the Accepted Contract Amount. No adjustment is applied to work valued on the basis of Cost or current prices. Where it applies:

    1. Under the FIDIC 1999 editions – the amounts payable to the contractor are adjusted for both rises and falls ‘in the cost of labor, goods and other inputs to the Works’ by adding or deducting amounts calculated in accordance with a prescribed formula (in the FIDIC Red and Yellow Books) or as set out in the Particular Conditions (in the FIDIC Silver Book).  

    2. Under the FIDIC 2017 editions – the amounts payable to the contractor are adjusted for both rises and falls ‘in the cost of labor, Goods and other inputs to the Works by adding or deducting amounts calculated in accordance with the Schedule(s).  

    In the FIDIC Red and Yellow Books 1999 a formula is set out, but this may be amended as the parties choose. The wording states: ‘The formulae shall be of the following general type’. The formula is as follows: 

    The n in the above formula refers to a defined period. This is usually the relevant payment period and so will typically be the month of the payment application. The o refers to the base date. Therefore, it applies the difference between the base index and the current index to the adjustable price element, bringing the contract price up in line with the change in the index (or down, if de-escalation is permitted).

    It is recognised that the formula set out above to calculate the adjustment multiplier (Pn), which is to be applied to the estimated contract value, is crude, but it is a fast and reasonably credible way of calculating and reimbursing fluctuations in costs.  The formula relies on:

    1.A fixed element (a), representing the nonadjustable portion in contractual payments, which is fixed at the time of Contract. FIDIC suggests 10% in the Appendix to Tender or Guidance.  

    2.The weighting of the resources (b) (c) (d), which is determined at the time of contract. For example, a road project might be 20/40/40 for labour, equipment and materials.  

    3. Cost indices for the current ‘now’ value (n) and the original value (o) for each of, for example, labor (L), equipment (E) and materials (M), which need to be updated frequently (preferably monthly rather than quarterly or annually, but that will depend upon the cost indices chosen).

    The mathematics involved are, therefore, relatively straightforward but the output of any formula is naturally dependent on the inputs which, although mathematical, are contractually defined. Consequently, both contractual and commercial review are essential.

    The FIDIC Silver Book 1999 and the FIDIC Gold Book 2008 do not set out a formula. The FIDIC Silver Book Guidance suggests that the wording for provisions based on the cost indices in the FIDIC Yellow Book be considered. The FIDIC 2017 editions do not set out a formula either. The Guidance states: ‘It is recommended that the Employer be advised by a professional with experience in construction costs and the inflationary effect on construction costs when preparing the contents of the Schedule(s) of cost indexation’

    What needs to be considered?

    Careful attention should be given to define key variables, such as:

    • The base date and/or start date
    • Triggers for applying the clause
    • Any caps on price increases
    • Any non-adjustable portion
    • Cost elements and weightings
    • The relevant reference indices
    • Whether different formulae are required for different costs
    • Currency variables, if needed
    • Any provisions for price de-escalation

    The price adjustment clause can directly define the commercial success of the project for the contractor in an inflationary environment. As a prime example, triggers for price adjustment often require a certain degree of increase before the clause is engaged, while a cap may prevent any cost above a certain degree of increase being passed on. This effectively creates a window of defined margin on certain core costs, and allocates an open-ended risk above the cap. 

    Conclusion

    In the current macroeconomic environment, contractors are increasingly concerned about how to handle recent cost increases, which are unprecedented in the modern era. For contracts without a price escalation clause, a detailed contract review may provide avenues to recover certain costs under other headings such as change of law, force majeure, or the variation procedures. Local law may also allow recovery, depending on the jurisdiction.

    In severe circumstances, commercial negotiation may become a necessity if the contractor is in risk of default, or if there are other risks to the project. Negotiated arrangements seen in practice include new financing, allowing some of the contractor’s proven costs to be deducted from liquidated delay damages, or new lump-sum contracts for work packages which are then removed from the main contract. All of these options are fraught with legal and commercial dangers and can bring further contentious issues if not handled carefully.

    With a view to the future, including price escalation clauses in contracts may seem disadvantageous to employers, as they are accepting the risk of increasing costs. However, price escalation clauses allow contractors to bid more accurately and competitively, resulting in lower bid prices for the employer. It also opens the door to price de-escalation, which would favour the employer if deflationary trends prevail during the project.

    Ultimately the most immediate benefit is that the project will not be endangered by contractor defaults, or contractor delays related to procurement and delivery issues arising from cost increases. In this regard, it should be borne in mind that the contractor’s delay is usually subject to liquidated delay damages, whereas the employer’s delay liability to other contractors is usually, at least theoretically, unlimited.

    Although it may seem like a risk for employers to accept price escalation clauses, the current and continuing uncertainty in global supply chains may cause havoc on future projects if not appropriately provided for in the contract. In this respect, the certainty provided by price escalation clauses has significant value in itself.