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Alliancing thriving post recession

Cecily Davis
14/07/2015

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United Kingdom

In the second part of her article on alliancing Cecily Davis examines some of the legal and cultural obstacles to its successful spread in construction

In the second part of her article on alliancing Cecily Davis examines some of the legal and cultural obstacles to its successful spread in construction. The thirst for this more collaborative way of working is strongly in evidence, she argues, despite a recent rise in disputes.

KEY POINTS

  • An increasing willingness to pursue relationship contracting or alliancing is evident
  • What stunted the growth of alliancing in the UK – cultural or structural issues
  • Heathrow T5 is now used as a learning piece by many academic institutions
  • The Cardiff Bay fiasco is very largely recognised as being the beginning of the end of non-contractual partnering
  • For alliancing to work, the parties must accept a no dispute concept June 2015

The end of the Great Recession has not been without difficulty for the construction industry. One curious but perhaps unsurprising side effect of recovery is that there would seem to be a return to the dispute feast that had been rested when money was in shorter supply. Those under bid contracts and over ambitious programmes have, indeed, come back to bite both employers and adjudication continues to power on. It seems fanciful then to suggest that against the backdrop of a renaissance in construction disputes there rests an increasing willingness to pursue relationship contracting or alliancing but, nonetheless, this would appear to be the case.

Alliancing as described by the European Construction Institute is a form of longer term partnership on a project in which a financial incentive scheme links the rewards of each alliance member to agreed overall objectives. A project alliance operates very differently to a traditional contractual structure and offers flexibility and adaptability.

In Australia something like a third of public sector projects are procured using alliancing as their base. This is a significant proportion and way in excess of that to which the UK is able to point. The interesting question of our time might well be what stunted the growth of alliancing in the UK and, if we believe that it can offer advantages to both public and private sector procurements, what can we do to encourage its use. Is our underlying reticence towards alliancing cultural or structural?

It is well understood and also well documented that the oil and gas industries, with BP at their forefront, used alliancing as the preferred route for procuring the delivery of North Sea oil. Testament to the success of the procurement method must be that the company has introduced it to other sizeable projects such as the Grangemouth refinery petrochemical construction project. The project had a value of over £500 million and was the first system successfully to produce higher grade synthesised ethanol.

Many praise BP’s Bob Scott, project manager for the Hyde and Andrew Alliances, with the vision to pursue alliancing. In 1994, he committed to writing some of the thoughts he had on the alliancing contracts he had put in place in a paper entitled Partnering and Alliancing Contracts, A company viewpoint:

‘The overwhelmingly attitude was that BP knew best and we could not rely on contractors and suppliers to deliver, unless we finely detailed our requirements then employed large teams to monitor check and police them at every stage. Of course there were many reasons why these attitudes and practices in doing business with our contractors and suppliers had developed over the years. Nevertheless it seemed clear that they were a root cause of high costs and taking action to produce changing them was perceived as a prerequisite to us achieving our goals.

Features in common

In particular relationships with our contractors and suppliers seemed to exhibit the following features: Short term and essentially adversarial in nature. Unaligned objectives. Accountabilities not clearly defined.’

Paul Roberts, during his time as project manager at Honda UK Manufacturing espoused the virtues of a ‘one team one goal’ culture and in doing so secured for Honda the British Construction Industry Award in 2002 for the European Car plant project.

Many of those who worked with Honda in the construction and ongoing maintenance of the facility spoke positively about their improvements to their own downstream supply management. Paul Roberts was evangelical about the benefits which Honda gained from the partnering approach.

Few projects have had the coverage that the Terminal 5 project for BAA has had some 14 years after its commencement. The project was about the need to increase the capacity of Heathrow Airport. It was an exceptionally complex scheme involving 16 projects and more than 140 sub-projects. The complexity of building between one of the world’s busiest airports and the UK’s business motorway should not be underestimated. It is now used as a learning piece by many academic institutions promoting collaborative contracting and project management. The success of the Heathrow project was measured largely on the absence of subcontractor claims, the very low incidence of health and safety issues, and the successful delivery on time and on budget. Its effects in the industry could be felt through the material successes that were the 2012 Olympics and Crossrail. Many cite the project as the beginning of the change towards relationship contracting witnessed in the UK construction industry since the encouraging principles set out Egan and Latham.

In the years since Latham and Egan wrote so enthusiastically about partnering thoughts about how best to achieve some of the benefits promised have matured. Egan felt that there was much to be said for a more moral based non-contractual style. He considered that no more than a charter of some sort for the way to resolve contentious items or matters was required.

Examples

There are many examples of failed non-contractual partnering arrangements that draw into relief the need to put in place a proper framework. One such example is the unfortunate tale of the Cardiff Bay Development project where St David’s Ltd and their contractor Birse Construction signed a charter with a number of stated aims. These included the promotion of trust, integrity, openness and honesty, the maximization of profits, and enhancing the reputation of all involved. The charter, with its ambitious and laudable aims was signed in May 1997. In November the parties expressed a common aim to execute the contract before the Christmas break and by March of the following year the client was notifying that LADS were to be deducted. In the summer the contractor had, according to the client, abandoned the site. It was the contractor’s position that there was no contract in place and so it could not be in breach and could not have abandoned the contract. The contractor brought a claim in the Technology and Construction Court arguing that it was due a quantum meriut. The Cardiff Bay fiasco is very largely recognised as being the beginning of the end of non-contractual partnering; suffice to say that reliance on a partnering charter is now rare. There is much more commonly a familiar contract amended to give teeth to the virtues articulated in historical charters. The Heathrow project referred to above is recognised as being the point of origin for something more robust and project allianced based.

The no dispute concept

The construction industry is often characterised by the very high level of distrust, much more so, it is felt than the majority of other industries. It is often described as being the industry with the strongest culture of distrust amongst its members (see Wood and McDermott, 1999). It is then easy to see that, as the very centre of an alliance agreement is the commitment by the participants to the ‘no fault, no blame’ concept, this itself forms a barrier to the willingness to embrace the benefits alliancing can deliver. For alliancing to work, the parties must also accept a no dispute concept which at its most basic is an acceptance that in the event of an act or omission by an alliance party, there is no enforceable action in law or in equity. The only exception to this is typically in the sphere of what is referred to as wilful default. The relevant provision might look something like:

‘No failure by a Project Alliance Party to perform an obligation or discharge a duty out of under or in connection with this Alliance Agreement will give rise to an enforceable action at law or in equity save where that failure constitutes Wilful Default’.

The Australian experience

In Australia where alliancing has been more established for some time, the enforceability of the ‘no dispute’ clause was the subject of much academic debate. Originally the received view was that a no default clause would be unenforceable on the basis that it was void for seeking to oust the jurisdiction of the courts. In Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643 the court considered:

‘It is not possible for a contract to create rights and at the same time deny to the other party to whom they vest the right to invoke the jurisdiction of the Court to enforce them’.

This early view has now been replaced with a more progressive interpretation based on the court’s reluctance to strike down bargains which parties have made in good faith. In Kymbo Pty Ltd v Paxton Management Pty Ltd [2001] NSW SC 792 it was suggested:

‘Courts are reluctant to hold void a provision which the parties intended to have legal effect particularly if there has been partial performance of the terms of a contract from which the party resisting specific performance has derived a benefit.’

The concept of wilful or deliberate default/breach under English law has been the subject of several cases, yet there has been no consistent approach as to its scope. Potentially the concept is a broad one, and may be interpreted as including any deliberate act which results in a default under or repudiatory breach of the contract.

UK approach

In the UK the additional dimension that makes the ‘No Dispute’ clause interesting is the existence of the Housing Grants Act and the right it gives any party to the contract to adjudicate a dispute at any time. Many have relied upon the attitude towards cl 66 of the ICE (7th edn) to support an argument that the UK courts would not and indeed could not approach no dispute provisions in the same way as has become the case in Australia. It is contended that there is a distinction to be made between the timing of bringing a dispute between a forum and the existence of a dispute to begin with. It is difficult to conceive that a provision in a project alliancing agreement which sought to support the no dispute provision would be considered against public policy. However, if there is real appetite in the UK to push toward the Australian model then there is a need properly to understand how the courts would view the project agreement complete with its no dispute provisions.

Consider circumstances in which a party terminates a contract early without any default by the other party, where it has no express contractual right to do so. Or a contract which contains performance guarantees which are subject to liquidated damages, or a requirement to expend a specified amount remedying defects, following a failure to meet the required performance. The party which has given the performance guarantees may refuse to carry out any further work once the financial cap on liquidated damages or spending has been reached. Both of these scenarios are capable of constituting wilful or deliberate defaults/breaches.

Consequences of wilful default

So what might be the consequences of the occurrence of wilful default? We might expect that the defaulting party might no longer be able to participate in the alliance, that there might be suspicion of payment and there might be an indemnity from the defaulting party to the non-defaulting parties. Whether the indemnity would be capped and cover or limit economic loss would be for negotiation.

In the UK it is probably Network Rail that is most strongly working toward a process of collaboration and alliancing with its suppliers. The Stafford Area Improvements Programme represents a real ‘pathfinder’ project for many of the new processes which have been developed within the organisation to get alliancing traction in the industry. This project is said by many to be the most sophisticated form of alliancing and collaboration in the UK at present and it is certainly the case that Network Rail is investing well in its future development and success.

 

This article was first published in the June issue of the Construction Law Journal.

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