Implications of Poorly Drafted Contract Documents
Poorly drafted contract documents are often the source of claims. If they contain contradictions or ambiguities, it is natural for each party to interpret the inconsistencies to their advantage, thus giving grounds for contention and dispute.
One of our distance-learning students recently asked for my opinion on the following case and I thought it would be worth sharing. The student’s description was as follows:
‘Although it was understood by the parties that the contract was to be a lump sum price, clause 14.1 of FIDIC Red Book in the conditions of contract was not amended to reflect this (Note: the un-amended FIDIC Red Book includes for the Works to be remeasured). In various other places such as the contract agreement, the letter of intent and the cover page, it clearly says that the type of contract is a lump sum. Our client’s auditors have issued a report to the client that the contractor may dispute the type of contract in the future.
The client now wants the contract amended and is seeking our own and legal advice. The lawyers have advised the Client to replace the Red Book with the Yellow Book, to which we responded back to the client that this ridiculous because, whilst the Yellow Book is for a lump sum price, it is also for design and build, which does not apply to this project’.
This is a perfect example of poor contract admin. If you do not put the effort into getting the contract right in the first place, the likelihood of claims and disputes is increased. Questions have to be asked about the consultant and client’s procedures here.
It is easy to see how contention could arise here. If the Contractor considered that a re-measurement would put him at a financial advantage, he could argue that the conditions of contract should be applied. If however, Sub-Clause 1.5 (Priority of Documents) is taken into account, it will be seen that the Contract Agreement and the Letter of Acceptance take precedence over the Particular and General Conditions, so consequently the lump-sum provisions are applicable. In addition to this, it seems fairly obvious that at the time of tender, the intention was to enter into a lump-sum contract.
In order to resolve the matter, I would suggest that a contract amendment be proposed to the Contractor. This could involve substituting the Clause 14 wording from the Red Book with that of the Yellow Book and would neatly change the remeasurable contract to a lump sum without changing the whole contract from a construct only to a design and build as suggested by the lawyers. If the Contractor objects to this, then Sub-Clause 1.5 (Priority of Documents) could be used to argue the case.
It took me about five minutes to come up with this solution. I wonder how much the lawyers charged the client for proposing their totally uninformed and unworkable solution?
What’s your opinion?
10 Comments
Add comment Cancel reply
This site uses Akismet to reduce spam. Learn how your comment data is processed.
I am working on a measured contract but in there, there are some lump sum items. Am I supposed to provide their break down or does this clause 14.1 (d) only apply to lump sum contracts?
Hi Hisham,
Thank you for sharing this with us. This is a good example of a conflict in the Contract documents. One the one hand the specification called for the site establishment for the Employer and Engineer’ to be provided to the end of the contract, which could be construed as meaning the end of the defects liability period and on the other hand the bill of quantities included the 60 month construction period.
The first place to look to resolve the conflict would be Sub-Clause 1.5 (Priority of Documents), where in most cases the specification would take priority over the bill of quantities. If I were working or the Contractor however, I would put forward two arguments against this. Firstly, in resolving conflicts, the specific must control the general. In this case, this would mean that the bill of quantities, which specifically mentions the time period would take precedence over the specification that has a less precise meaning. Secondly, I would refer to the principle of contra preferentem, which basically means if a party makes a mistake in drafting a document, any conflicts or ambiguities must be interpreted in favour of the other party.
I have no doubt however, that the Engineer would defend his position rigorously, as it is likely that the mistake was his.
In my experience, many contractors fail to undertake a thorough review of the contract documents during the tender or the negotiation periods. Had your company done so in this case, the matter could have either been raised as a tender queried, or negotiated before signing the contract.
Dear Andy
Thank you for your comments on this case.
I have another example, on a small contract, but the issue – in my view- is of major significance.
It concerned a Demolition contract, based on the FIDIC 1977 Red Book. The contract involved the dismantling and demolition of about 35 industrial buildings and other structures on an existing disused industrial estate. It was a preparatory contract, intended to make way for construction of a new factory complex. The work included the removal and disposal of foundations for buildings and other structures. However, ALL bill items for demolition were lump sum items: one item for demolition each entire building, including removal of its foundations. The whole bill was less than 40 items.
There were no details of the foundations on the drawings. It seems that the Consultant who prepared the tender documents did not have as built drawings of the existing structures. He simply surveyed the existing buildings and prepared drawings showing only the superstructures. As a consequence, there was no information on the size or quantities of the foundations anywhere in the tender documents or in the eventual contract that was signed.
During the demolition work the Contractor quickly realised that the foundations were much larger than what he had anticipated.He claimed based on unforseeable physical conditions and artificial obstructions. The claim was rejected, as removal of the foundations was very clearly a part of the contract. It was only the quantities that were unknown.
Would the Contractor have any case in law in any jurisdiction?
Hisham,
Thank you for sharing your example with us.
I do however disagree that the case in question was a matter of a badly drafted contract. If we consider that the buildings were due for demolition, it is likely that they were quite old and consequently it is unsurprising that there were no as-built records to show the extent and type of the foundations. It would have also been impractical and expensive for the consultants to investigate the foundations in order to accurately quantify them.
It seems therefore, that the decision was made when drafting the contract, to make the removal of the foundations a contractor’s risk item. In other words the contractor was obliged to use his experience to price for the removal of whatever foundations were subsequently found.
It seems to me that this was a sensible decision and the fact that the bill of quantities included for the demolition of the building and foundations as lump sum items, supports this.
Having entered into the contract on this basis, the Contractor had no right to claim for additional payment because he under-estimated the work. Additionally, the Contractor could not reasonably argue that the foundations were unforeseeable. I think that the Engineer acted correctly in rejecting the claim and I believe that the law would support this position.
Dear Andy
Thank you for your comments.
Having actually witnessed this dispute my feeling was that the drafter of the document should have made removal of the foundations on a cubic metre basis. He could have made an intelligent guess of the quantity based on similar buildings of similar design and perhaps added a little bit more. If we expect the Contractor to be able to estimate it, why can’t the Consultant do the same at the beginning? Of course, this is easy to say with the benefit of hindsight.
I agree with you that some Consultants believe it is sensible to transfer such risks to the Contractor. However, when there is not enough information available to accurately estimate the quantities, disputes are likely to arise.
I have read somewhere in the literature that such situations require measured items, not lump sum. This seems to be good advice. At least the quantity estimated would be the starting point. If it varies greatly the unit rate could be renegotiated.
Hi Hisham
A good suggestion. Maybe a good solution would have been for the consultants to have estimated the quantities and to make the below ground work provisional or subject to remeasure. This would have been a balanced sharing of the risk.
Dear Andy
Thank you for a very useful blog.
Yes, I do have examples of where poor drafting caused disputes.
One example concerned a large project in a remote location where the Contractor was providing services to the Employer/Engineer (E/E). These included offices, cars, meals…etc to over 100 E/E staff on site. The specification detailed these services. At the end of the section, the spec stated: ” These services shall be continued up till the end of the contract”.
Payment for these services was on time basis for O&M of vehicles..etc. The quantity in the BOQ for these time related items was 60 months- the original contract period.
Just before the Taking Over Certificate was issued , the Engineer advised the Contractor that all these services shall continue during the DNP ( which was 2 years) . A considerable number of E/E staff was envisaged to stay on site during this period. The Contractor rejected this as the BOQ indicated that these services were only for the original contract period. The Engineer referred to the spec and the CoC and argued that the contract was deemed to be in force during the DNP.
The contract was FIDIC 1999 Red Book with an escalation formula. What the Contractor was really concerned about was that these E/E were not subject to escalation.
The dispute could not be resolved. E/E services were discontinued and were taken over by the Employer.
I would be interested in your views and comments.
I have another (more difficult) case which nearly went to court, but I will send it at a later time.
I am sure every one agrees that giving an opinion based on abstract could be very dangerous. To advice on such case, the complete contract documents should be made available for whoever is requested to provide an opinion. Based on the available info, we may nevertheless exchange our opinions on the case for the purpose of sharing knowledge and expertise within our industry.
I would agree with Andy that the ideal solution is to propose a contract amendment that may involve number of clauses not only clause 14. Other clauses probably more important include 12 Measurements and Evaluations and 13 Variations and Adjustments. However there is possibility that the Contractor will reject any amendment to the Contract and if he did so, the client will not be able to force such amendment.
In assessing the case, I don’t see how this is a big issue. If the LOI and Contract Agreement states that the Contract Price is a Lump Sum, then the Contract is a Lump Sum and all what the client / Engineer should worry about is the discrepancy between the Conditions of Contract and the LOI and Contract Agreement. Clause 1.5 Priority of Documents gives priority to Contract Agreement and Letter of Acceptance over Particular and General Conditions of Contract in case of discrepancy. My advice would be that the Engineer should, as per clause 1.5, issue clarification or instruction regarding this discrepancy. Also, it would be interesting to know whether the Letter of Tender / Form of Tender states that the proposal is a Lump Sum Price. If this is the case, then the Client has nothing to worry about.
What the Engineer should also do is to use sub-clause 14.1 “d” to request the Contractor to submit its breakdown of Lump Sum Contract Price. This sub-clause obliges the Contractor to submit a breakdown of each Lump Sum Price in the Schedule and would see no reason for not applying this sub-clause on the Contract Price.
Well, I think that both parties to the Contract have their share of liability with regard to the poor drafting of the Contract. Whilst, it is perceived that this poorly crafted piece of work came from the Employer, notwithstanding at the Contract Formation stage, or even prior to that, the Contractor should have spotted this pitfall and should have advised the Employer / Engineer / CA.
From my point of view the industry is currently driven by money, which is normal, however people tend to think of the Contract Price (Revenue) rather than the broad obligations of the Contract which assures Profitability. This kind of approach entails overlooking of the small details, and some time major ones, in quest of meeting the sales plan.
A trivial issue that came into my mind; did the Employer amend Sub-Clause 1.5 for the Priority of Contract Documents to read LOI in lieu of LOA? I am asking this because non-uniformity of terminology has also the flavour of disputes in its folds.
Ahmed,
Thank you for your comments.
Whilst I agree with you that both parties were at fault for letting such a situation arise, I do not agree that the Contractor has any liability for a poorly drafted contract. Yes, it would be sensible for a Contractor to bring up any ambiguities or conflicts in the contract documents before the contract is signed, but the ultimate responsibility for getting the documents correct rests with the drafter of the contract and the principle of contra proferentem supports this. Osborn’s Concise Law Dictionary offers the following definition of contra proferentem:
‘The doctrine that the construction least favourable to the person putting forwards an instrument should be adopted against him’, where “instrument” is defined as ‘A formal legal document in writing’.
Simply put, this means that the drafter of the document has every chance produce a clear and unambiguous document and if any mistakes, ambiguities or conflicts exist in the document, they must be interpreted in the favour of the other party.
You have also mentioned one of my pet subjects, which is inconsistencies in terminology, which happens all too often (I also hate the use of abbreviations and acronyms). It is very common to see different sections of claims and responses refer to the same thing by different names. At best this is just annoying and displays the unprofessionalism of the drafter, but at worst, this could provide a basis of contention.
In this case under discussion there is reference to a letter of intent and a letter of acceptance, which are two entirely different things and this could have a serious outcome.
Does anyone else have examples of how poor contract drafting has caused conflicts or resulted in claims?