Engineers & the Law: All for One?
August 1, 2012
By By Owen Pawson Miller Thomson LLP
There are compelling benefits to working as a team towards a common goal: cost savings can be achieved, risk is spread among the participants, and profit is shared following a successful project. This is the theory on which Integrated Project...
There are compelling benefits to working as a team towards a common goal: cost savings can be achieved, risk is spread among the participants, and profit is shared following a successful project. This is the theory on which Integrated Project Delivery (IPD) is based and championed. However, there are challenges that follow the benefits of the collaborative model used with IPD. Legal issues are bound to arise when a group of individuals come together to work on something as complex as a modern construction project. The following highlights some legal challenges of IPD.
between the parties
In the traditional model for construction projects, the parties work independently through a matrix of direct legal contracts. Each party is only concerned about what the other party in the same contract is doing and not necessarily what parties outside that contract are doing. While there are typically many contracts in place for a project, in traditional projects there is really only one “type” of contract in use — the “transactional” contract. A transactional contract is the classic contract where clearly described goods and services are exchanged for money or other consideration, and where there are clear obligations, rights, and remedies set out for each party.
In the integrated project delivery model there is still the transactional contract between the owner and the “pact” of project team members, which is the “Primary Contract.” The primary contract specifies the work to be performed, the legal rights and responsibilities of the owner and each team member, and the price to be paid for the project. The primary contract is the one that may go out for tender, and if something goes awry, it is also the basis on which the owner and the team members will seek their remedies.
But with IPD, a second type of contract defines the unique relationship between the team members in the pact, i.e the “Secondary Contract.” This is a “relational” (or “alliance”) contract. Relational contracts bind the parties within the relationship and establish duties owed by each member to the other members.
The aspect of a relational contract that makes it attractive — the “all for one” notion – is also the source of its potential problems.
For better or worse
Team members are responsible for coordinating their individual work with the work of the other members to ensure the pact operates seamlessly as a cohesive whole. Each member has the same goal of getting the project completed on time and hopefully within budget. But the lines that are so stark in the context of traditional contracts become blurry in the IPD model. In traditional contracts, those lines provide each party with a clear demarcation of responsibility and liability. However, because of the necessary blurring of the lines in the relational contract, the parties are at increased risk, given the lack of crisp clarity of their exact duties.
Setting the right terms
The problems raised by the secondary contract are not new. Relational contracts are often used by partnerships and joint ventures. The idea that one partner can act as agent for another partner is useful (and often necessary) in certain contexts. But there are typically limits to that agency.
The solution lies in the terms of the secondary contract. These contracts should be carefully drafted to include provisions that take into account a number of considerations.
Typically, major construction firms take the lead in primary contracts, although other parties could fill this role if they have sufficient resources and experience. In any event, the lead party should be clearly identified.
There should also be an obligation by each party to the secondary contract to disclose any fact that could negatively impact that party’s ability to perform, as well as a right to inspect each other’s books. Both concepts are consistent with the principle of fair dealings between the parties over the course of the project.
In addition, a clearly defined mechanism for a speedy resolution of disputes should be included to ensure that any small irritants between the parties do not escalate into major disputes.
Insurance coverage requirements between parties to the secondary contract should be identified. They should be complementary and address project risks and the possibility of claims for damages caused by other secondary contract parties.
Finally, a clear formula for the distribution of income from the project is an essential part of that secondary contract.
The best way to avoid legal issues arising is to choose the team members carefully. No matter how well the secondary contract is drafted, a fundamental lack of trust between the parties will hamper their efforts to achieve efficiencies and will reduce profitability for all the team members. While it is important to define the relationships through a contract, it is equally important to develop strong communications and trust between the team members and thereby avoid disputes. Each IPD project is unique and, consequently, each contract should be customized to reflect the unique relationships and requirements for each team member.
“All for one and one for all” may have worked for the Three Musketeers, but in the context of today’s construction projects, the parties also need to ensure they have a well drafted contract in place.cce
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the formula for distributing income
Owen Pawson is with Miller Thomson LLP in Vancouver. Contact him at e-mail firstname.lastname@example.org