International construction contracts that we should study
Being “International”
Being
“International”, in my view, ties to a recognition of the influential countries
in the world arena who (diligently) incorporate the rules or the code of
conduct/practice for their coexistence. When their meetings come to an
agreement, it becomes a pressure that all countries around the world have to consider to
follow them as international standards (especially for those with less
bargaining powers), otherwise they would be listed as out-of-standards. If they wish
to get into the association, they must upgrade themselves to meet the standards
that have (diligently) been set up by the group of leader who will maintain such
leadership by reviewing and revising the rules for followers to study and
follow. Who are in the position of the leaders and the followers? It’s easy to answer
this question right away ... We have already been in our position for so
long. Shall we start running
(diligently) for a better position?
National construction contract of our neighbors.
We start out running fast today trying to speed up to a better position. We may never think about chasing of the world leader. Just keep heading to the top three of the ASEAN group as we may think we already are. It is good enough for this awakening. Being with the same old pace means slowing down and becoming backwards as every players in the arena today are all speeding up in full effort to a new position. We do not want to be the one who was left behind, do we?
Coming back to the stand point of this blog, we will talk about the idea of upgrading national standard of construction contract and contract administration that would lead to the upgrading of the dispute resolution process in construction projects for the country like Thailand. Let's start referring to our neighbors. For instances, Malaysia has laid down such fundamental with its own national standard form of construction contract namely JKR / PDW, for public construction contracts, and PAM (Pertubuhan Arkitek Malaysia) for private or public building contracts. Singapore also has PSSCOC (Public Sector Standard Conditions of Contract for Construction Works) to be applicable to public construction contracts and SIA (Singapore Institute of Architects) Articles and Conditions of Building Contract for using with building contract of the private sector. We can see that our southern ASEAN members have run far ahead for us to keep chasing.
We have some standard forms of construction contract such as those in accordance with the Regulations of the Office of the Prime Minister on Procurement B.E.2535 (A.D.1992) which should have been compared with the international forms and continuously improve to make our conditions and administration of the government and the private sector’s construction contract become more effective towards international standards. Then the new standardized contract forms should be available nation-wide on any government’s web sites.
International Construction contracts.
For some example of the standard international construction contract made by the leaders of the world, like the United States, it is the AIA contract: the American Institute of Architects Standard of Contract, and like the United Kingdom, another world’s veteran lawmaker, they are JCT (The Joint Contracts Tribunal), ICE (Institution of Civil Engineer), ICOB (the Chartered Institute of Civil Engineers), NEC (New Engineering Contract) etc.
Even in commonwealth countries, JBCC (Joint Building Contracts Committee) Contract is a standard one used in South Africa or the former one like Hong Kong, they have an agency called DEVB who develops and maintains standardized construction contracts and many other code of practices in a systematic way.
Now, we come to the standard forms of construction contract in Europe. The FIDIC (Fédération Internationale des Ingénieurs-Conseils) contract, which was established by the International Federation of Consulting Engineers has been widely accepted all over the world for over a hundred years. FIDIC is the most recognized international contract for construction industry in the country like Thailand. This could be because the world lender' organizations who provide loans for investments in many large scale construction projects, such as the World Bank, the Japan International Cooperation Agency (JICA) or the Asian Development Bank (ADB) will require borrowers to use FIDIC contract to draft and complete contracting. Investing on large national construction projects by the country like Thailand, as a borrower, will unavoidable need to study and understand the content of those FIDIC forms of contract.
Similar to other standard contracts, such as NEC, JCT, etc. These international contracts are available in several standard forms for user to choose from, depending on the type of construction to be executed. For FIDIC, its standard contracts will be categorized by the name of the color of the cover, i.e. Red Book for the build-to-employer’s design works, Yellow Book for building Electrical/Mechanical plant or design-build works, Silver book for building large scale Turn-Key projects like power plants, petrochemical plant or any big infrastructure projects, etc., as an EPC (Engineering, Procurement and Construction) Contract, Gold book that the contractor has to provide operation following construction completion or Green book which is a short form version and suitable for small and not complicated projects.
I, hereby, would like to mention about a Thai organization that is one of the leading organizer for the training of "Administration of FIDIC International Engineering/Construction Contract". It is namely the Consulting Engineers Association of Thailand (CEAT) whom I personally praise for their attempt to drive the enhancement of this construction industry.
Nature of disputes in construction – The party who understand and can accurately recollect from Contract Conditions will take better advantage.
By nature of the administration of any construction contracts, the major disputes are mostly derived from the employer’s disagreements with the contractor's claims for additional payments to alleged compensable losses/damages and/or for extension time to postpone the contract completion date from alleged excusable delay. With the drafting style of construction contracts used in the public and private sectors in the country like Thailand, it is often, in my view, not so fair for the (local) contractor as provided in many clauses of the contract. Even though we are able to succeed with many domestic projects with the aforementioned contract style, (apart from mentioning that which local party is often got lost or damaged after completion or termination of the contract), but when the local entrepreneurs enter to invest abroad and are in the position of employers of foreign contractors, they may not be easily sure, with the form of contracts used in those countries in which they invest, of their advantages as formerly accustomed to local style of construction contract. As can be seen from many cases of some local real estate developers, they rarely succeed in control of project time and construction costs incurred as a result from claims by foreign claim-oriented contractors under unfamiliar condition of contracts and foreign law enforcement. They should be able to do better developer’s business from successful projects, if they were equipped with proper international counter-claim knowledge and skill.
On the other hand, for the contractor from a country like Thailand, when trying to get offshore construction works and being in the position of alien contractors, if without precise understanding of the terms of conditions of the contract used in those countries (whether the contract met international standard that are widely accepted as a fair one or not), they often suffers from losses on doing construction contractor’s business in there. The contractors, as aliens, were not only unable to claim for an extension of time and compensation for any losses and damages from prolongation, but also demanded by the employer for the charge of liquidated damages of project delay. The contractors from the country like Thailand were, therefore, not strong enough to compete with giant international construction companies in the international arena. The best the local contractor could do up to now, is merely to join as a member of a consortium or a joint venture with international contractors to get a smaller piece of cake sharing. They should be able to do better contractor’s business from successful projects, if they were equipped with proper international claim knowledge and skill.
International Practices on Dispute Resolution in Construction.
One of a factual reason that standard form of international contracts are widely accepted, is that the contents of contractual conditions as written by the drafting committee have been made on the basis of fairness to both parties, i.e. the employer and the contractor. The contracts always identify an employer’s representative as an additional party who provide site supervision and determination on initial disagreement between the two parties at site. In addition, the contracts usually provide an Alternative Dispute Resolution process for the parties to proceed when the dispute arose between the two parties at an early stage, following dissatisfying the employer representative’s determination, to try to settle the dispute primarily by a mediator who was either elected or appointed under the condition of contract. The dispute can then be escalated to longer and more costly proceeding under the arbitration process, if primarily unsettled, and this can be finally escalated to even longer and more costly proceeding under the litigation process with the court in the event that the arbitral judgment is unacceptable by a party.
FIDIC contract calls said employer’s representative as “The Engineer”. This party are known as a consulting engineer in Thailand. (Many contracts whether they are based on FIDIC or not, may call this party differently, such as The Architect, The Project Manager, The Construction Superintendent, The Contract Administrator, etc.) The Engineer is usually hired by the employer to oversee the construction work and administer the contract. By this nature as working for the employer's interests, in order to prevent the Engineer's inability to adhere to its professional ethics and act impartially as required by FIDIC, FIDIC has further provided the parties to jointly appoint a Dispute Adjudication Board (DAB), as a committee member(s) who understand(s) the nature of the construction work and will participate in construction monitoring from the outset of the project. The DAB will make judgment on dispute on behalf of both sides so it may be either one person whom were mutually trusted or one person per each party plus a mutually trusted chairman becoming three persons to form the DAB. This depends on the project size and budget to pay for the DAB whether it is acceptable by the two parties who must share their responsibility for this cost. DAB's decision is final and binding on both parties at the end of 28th day after the decision making, which is comparatively fast and cost-effective. However, a party can make a reasonable objection with the DAB’s decision in writing to the other party to expresses its wish to escalate the case to arbitration and/or finally to court which will be a prolonged and costly processes accordingly.
National construction contract of our neighbors.
We start out running fast today trying to speed up to a better position. We may never think about chasing of the world leader. Just keep heading to the top three of the ASEAN group as we may think we already are. It is good enough for this awakening. Being with the same old pace means slowing down and becoming backwards as every players in the arena today are all speeding up in full effort to a new position. We do not want to be the one who was left behind, do we?
Coming back to the stand point of this blog, we will talk about the idea of upgrading national standard of construction contract and contract administration that would lead to the upgrading of the dispute resolution process in construction projects for the country like Thailand. Let's start referring to our neighbors. For instances, Malaysia has laid down such fundamental with its own national standard form of construction contract namely JKR / PDW, for public construction contracts, and PAM (Pertubuhan Arkitek Malaysia) for private or public building contracts. Singapore also has PSSCOC (Public Sector Standard Conditions of Contract for Construction Works) to be applicable to public construction contracts and SIA (Singapore Institute of Architects) Articles and Conditions of Building Contract for using with building contract of the private sector. We can see that our southern ASEAN members have run far ahead for us to keep chasing.
We have some standard forms of construction contract such as those in accordance with the Regulations of the Office of the Prime Minister on Procurement B.E.2535 (A.D.1992) which should have been compared with the international forms and continuously improve to make our conditions and administration of the government and the private sector’s construction contract become more effective towards international standards. Then the new standardized contract forms should be available nation-wide on any government’s web sites.
International Construction contracts.
For some example of the standard international construction contract made by the leaders of the world, like the United States, it is the AIA contract: the American Institute of Architects Standard of Contract, and like the United Kingdom, another world’s veteran lawmaker, they are JCT (The Joint Contracts Tribunal), ICE (Institution of Civil Engineer), ICOB (the Chartered Institute of Civil Engineers), NEC (New Engineering Contract) etc.
Even in commonwealth countries, JBCC (Joint Building Contracts Committee) Contract is a standard one used in South Africa or the former one like Hong Kong, they have an agency called DEVB who develops and maintains standardized construction contracts and many other code of practices in a systematic way.
Now, we come to the standard forms of construction contract in Europe. The FIDIC (Fédération Internationale des Ingénieurs-Conseils) contract, which was established by the International Federation of Consulting Engineers has been widely accepted all over the world for over a hundred years. FIDIC is the most recognized international contract for construction industry in the country like Thailand. This could be because the world lender' organizations who provide loans for investments in many large scale construction projects, such as the World Bank, the Japan International Cooperation Agency (JICA) or the Asian Development Bank (ADB) will require borrowers to use FIDIC contract to draft and complete contracting. Investing on large national construction projects by the country like Thailand, as a borrower, will unavoidable need to study and understand the content of those FIDIC forms of contract.
Similar to other standard contracts, such as NEC, JCT, etc. These international contracts are available in several standard forms for user to choose from, depending on the type of construction to be executed. For FIDIC, its standard contracts will be categorized by the name of the color of the cover, i.e. Red Book for the build-to-employer’s design works, Yellow Book for building Electrical/Mechanical plant or design-build works, Silver book for building large scale Turn-Key projects like power plants, petrochemical plant or any big infrastructure projects, etc., as an EPC (Engineering, Procurement and Construction) Contract, Gold book that the contractor has to provide operation following construction completion or Green book which is a short form version and suitable for small and not complicated projects.
I, hereby, would like to mention about a Thai organization that is one of the leading organizer for the training of "Administration of FIDIC International Engineering/Construction Contract". It is namely the Consulting Engineers Association of Thailand (CEAT) whom I personally praise for their attempt to drive the enhancement of this construction industry.
Nature of disputes in construction – The party who understand and can accurately recollect from Contract Conditions will take better advantage.
By nature of the administration of any construction contracts, the major disputes are mostly derived from the employer’s disagreements with the contractor's claims for additional payments to alleged compensable losses/damages and/or for extension time to postpone the contract completion date from alleged excusable delay. With the drafting style of construction contracts used in the public and private sectors in the country like Thailand, it is often, in my view, not so fair for the (local) contractor as provided in many clauses of the contract. Even though we are able to succeed with many domestic projects with the aforementioned contract style, (apart from mentioning that which local party is often got lost or damaged after completion or termination of the contract), but when the local entrepreneurs enter to invest abroad and are in the position of employers of foreign contractors, they may not be easily sure, with the form of contracts used in those countries in which they invest, of their advantages as formerly accustomed to local style of construction contract. As can be seen from many cases of some local real estate developers, they rarely succeed in control of project time and construction costs incurred as a result from claims by foreign claim-oriented contractors under unfamiliar condition of contracts and foreign law enforcement. They should be able to do better developer’s business from successful projects, if they were equipped with proper international counter-claim knowledge and skill.
On the other hand, for the contractor from a country like Thailand, when trying to get offshore construction works and being in the position of alien contractors, if without precise understanding of the terms of conditions of the contract used in those countries (whether the contract met international standard that are widely accepted as a fair one or not), they often suffers from losses on doing construction contractor’s business in there. The contractors, as aliens, were not only unable to claim for an extension of time and compensation for any losses and damages from prolongation, but also demanded by the employer for the charge of liquidated damages of project delay. The contractors from the country like Thailand were, therefore, not strong enough to compete with giant international construction companies in the international arena. The best the local contractor could do up to now, is merely to join as a member of a consortium or a joint venture with international contractors to get a smaller piece of cake sharing. They should be able to do better contractor’s business from successful projects, if they were equipped with proper international claim knowledge and skill.
International Practices on Dispute Resolution in Construction.
One of a factual reason that standard form of international contracts are widely accepted, is that the contents of contractual conditions as written by the drafting committee have been made on the basis of fairness to both parties, i.e. the employer and the contractor. The contracts always identify an employer’s representative as an additional party who provide site supervision and determination on initial disagreement between the two parties at site. In addition, the contracts usually provide an Alternative Dispute Resolution process for the parties to proceed when the dispute arose between the two parties at an early stage, following dissatisfying the employer representative’s determination, to try to settle the dispute primarily by a mediator who was either elected or appointed under the condition of contract. The dispute can then be escalated to longer and more costly proceeding under the arbitration process, if primarily unsettled, and this can be finally escalated to even longer and more costly proceeding under the litigation process with the court in the event that the arbitral judgment is unacceptable by a party.
FIDIC contract calls said employer’s representative as “The Engineer”. This party are known as a consulting engineer in Thailand. (Many contracts whether they are based on FIDIC or not, may call this party differently, such as The Architect, The Project Manager, The Construction Superintendent, The Contract Administrator, etc.) The Engineer is usually hired by the employer to oversee the construction work and administer the contract. By this nature as working for the employer's interests, in order to prevent the Engineer's inability to adhere to its professional ethics and act impartially as required by FIDIC, FIDIC has further provided the parties to jointly appoint a Dispute Adjudication Board (DAB), as a committee member(s) who understand(s) the nature of the construction work and will participate in construction monitoring from the outset of the project. The DAB will make judgment on dispute on behalf of both sides so it may be either one person whom were mutually trusted or one person per each party plus a mutually trusted chairman becoming three persons to form the DAB. This depends on the project size and budget to pay for the DAB whether it is acceptable by the two parties who must share their responsibility for this cost. DAB's decision is final and binding on both parties at the end of 28th day after the decision making, which is comparatively fast and cost-effective. However, a party can make a reasonable objection with the DAB’s decision in writing to the other party to expresses its wish to escalate the case to arbitration and/or finally to court which will be a prolonged and costly processes accordingly.
If the
construction industry of a country like Thailand is capable to improve to
promote its industrial standards to be fair, clear, concise, and more modern,
and if it can upgrade the level of knowledge and understanding of the construction contract towards
international standards, it will be of great benefit to the industry. And if a
construction law can be legislated, a Thai Construction Law Association
(similar to the SCL: The Society of Construction Law in the UK), can be set
up, along with the upgrading of the Thai judicial system to be proceeded with
specialized court from appointed personnel with specific expertise in
construction cases for the sake of fair and widely accepted settlement for national
construction project disputes, it is believed that we will become a stronger
competitive nation. We can possibly start from a cooperation with ASEAN
countries to grow our international recognition on these matter.
The next
episode will talk about designated terms often appear in international contracts.
If interested, please follow ...
References and Credits:
- https://simplymalaysia.wordpress.com/standard-forms-of-contract/domestic-standard-contract-forms/pam-2006/
- https://theveritasdesigngroup.com/global_files/pdf/PAM_Contracts.pdf
- http://www.sia.org.sg/building-contracts.html
- https://www.bca.gov.sg/PSSCOC/psscoc_construction_works.html
- https://www.aiacontracts.org/
- https://www.hba.org/wp-content/uploads/2014/11/B-4-AIA-Doc-A107-2007.pdf
- https://www.neccontract.com
- http://download.e-bookshelf.de/download/0000/5977/19/L-G-0000597719-0002363144.pdf
- https://www.designingbuildings.co.uk/wiki/Construction_contract#NEC_.28The_New_Engineering_Contract.29:_Engineering_and_Construction_Contract.29.
- http://www.jbcc.co.za/
- http://www.devb.gov.hk/en/publications_and_press_releases/publications/standard_contract_documents/index.html
- https://www.jctltd.co.uk/product/minor-works-building-contract-with-contractors-design
- http://fidic.org/
- https://www.slideshare.net/abinrjky/fidic-jct-and-nec-contracts
- http://ww8.org/fidic-red-book-construction-contract
