Legally Bound

Jordan ... deciding who controls what.

Jordan ... deciding who controls what.

Contract administration: who’s in charge?

While the new editions of the Fidic books stipulate that the contract administrator should act neutral between the contracting parties, employers in the Middle East will continue to prefer full control of contract administration, says STUART JORDAN*

June 2018

Employers in the Gulf region put a high premium on maintaining complete control of the way construction contracts are operated. This means that a lot of contracts are “self-administered”. In short, a lot of employers just don’t like the idea of an independent nominated contract administrator taking decisions which affect the employer’s interests.

We have looked at this trend before; in particular, the almost routine amendment of Fidic (International Federation of Consulting Engineers) contracts to remove this risk.

The Second Edition of the Red and Yellow books (Clause 3.7.) provides that the engineer shall act neutrally between the parties and shall not be deemed to act for the employer when considering agreements and determinations. Most of the big issues that determine final cost and time outcomes are dealt with under this clause. All such determinations must be “fair”, taking all circumstances into account.

Even Fidic’s Second Edition Silver Book has moved in the same direction. The First Edition provided that the employer may appoint an “employer’s representative” (instead of an engineer) and did not require a determination to be “fair”. The new form requires an employer’s representative to be appointed and their determinations must be fair.

In removing all of this, the employer intends, of course, that the person handling the tasks of contract administration (whether titled engineer or something else) shall, in all respects be no more than the employer’s agent – his eyes, ears and spokesman, without any pretence of independence.

These employers’ concerns about “independent and fair” decisions are understandable, given the large sums of money invested in construction projects, and there is nothing inherently wrong in self-administering a contract. But we should look at whether there are potential drawbacks from the use of an agent whose actions are deemed to be those of the employer.

The first potential problems may arise from breach of the contract. A nominated contract administrator is a third person with a designated separate role. He is neither a party to the contract, nor an agent of either of them, and his determinations – correct or otherwise – do not amount to breach by either party. In contrast, an employer (using an employer’s agent) must still determine matters (such as claims entitlement) according to the contract. If a claim is assessed and refused, a contractor has the opportunity to take the issue to disputes resolution in the usual way – but the contractor here may have an additional claim for breach of contract, based on the failure of the employer’s agent to determine the claim correctly in the first place.

The second potential problems arise from unintended consequences of an agent’s action or decision binding the employer. A self-administered contract might typically provide that the employer’s agent is “the person as shall be notified to the contractor, to act on behalf of the employer on all matters relating to the contract”.

So technically, the agent could terminate the contract, certify shoddy or incomplete work as acceptable, waive any breach, amend the contract, issue a change order to double the size of the works or anything else. Employers rely on safeguards against this risk – but do they always work?

Firstly, employers may impose limits on the agent’s authority to deal with the construction contract, through the agent’s appointment or contract of employment. However, unless those authority limits are set out in the construction contract (which is not the case in the above definition) or otherwise communicated to the contractor, those appointment authority limits are irrelevant.

Secondly, contracts usually include protective provisions such as: “No inspection, test, failure to inspect, approval, rejection, comment, failure to reject, payment, certification, valuation of work, enforcement or failure to enforce, shall constitute a waiver.”

These are sensible measures but they have their limits. An employer’s agent with no stated limits to his authority is, of course, capable of waiving breach or amending the contract. It all depends on what is said and done by the agent, and the context.  Whilst it is true that none of the above is necessarily a waiver – but a clear waiver is still a waiver!

In contrast, a separate contract administrator’s function is set out in the contract and, importantly, that gives the employer the opportunity also to object. If a contract administrator did purport to waive a breach or amend the contract, or act outside of his authority, this is null and void.

Similarly, the employer is not bound by a contract administrator’s determinations (for instance, extensions of time or valuations of changes) if they think they were wrong.

I expect employers in the Middle East will continue to prefer full control of contract administration, but control has its risks.

 

* Stuart Jordan is a partner in the Global Projects group of Baker Botts, a leading international law firm. Jordan’s practice focuses on the oil, gas, power, transport, petrochemical, nuclear and construction industries. He has extensive experience in the Middle East, Russia and the UK.




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