Construction contracts: Achieving a fair balance of risk post-lockdown

Euan Massey, director at MDA Attorneys

“While there are some changes being introduced to standard form contracts, as well as particular conditions of contract, they do not adequately address the risks faced by the parties to a construction contract,” says Euan Massey, director at MDA Attorneys.

The most obvious risk over the past 18 months has been the impact of the Covid-19 pandemic. Massey says that none of the standard form contracts were able to ensure a fair sharing of risk between employer and contract in terms of the impact of the pandemic. “Certain contracts entitled contractors to time extensions only. As a result, contractors bore the brunt of financial losses due to the halting of construction. They also carried the costs of the additional safety measures required on active sites,” he explains.

Yet other standard form contracts allowed contractors to claim additional costs and extensions of time. Massey says that in many cases, this resulted in the employer carrying most of the financial loss and additional costs associated with the changed health and safety requirements.

Covid-19 no longer unforeseeable

Soon after Covid-19 was declared a pandemic, several attorneys began to draft clauses to more equitably address its impact, yet there are still parties concluding contracts without a Covid-19 clause. Since Covid-19 is no longer unforeseeable, parties are assumed to have allowed for the risk associated with the pandemic in a contract before entering into it, so it is really problematic not to include a Covid-19 clause.

Covid-19 clauses which are being included as particular conditions in standard form contracts typically deal with the impact of localised outbreaks of Covid-19 on site and the possible ramifications of additional lockdowns and/or changed legislation. To achieve a fair balance of risk, the parties typically agree to the contractor receiving payment for identifiable costs associated with these impacts, and extensions of time.

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Greater focus on dispute avoidance

Over the past few years, dispute avoidance clauses have been included in the most common standard form contracts (FIDIC 2017 and NEC4). The purpose of these clauses is to identify early interventions to avoid or limit the extent of disputes.

“Dispute avoidance clauses require that the parties resolve their disagreements by reaching consensus, which is typically achieved with the intervention of a third party or a board. However, these dispute avoidance procedures are unlikely to prove successful in the public sector as they do not address the issues faced by public sector officials under increased scrutiny,” says Massey.

Adjudication growing in South Africa

Locally, there has been a continued increase in the use of the adjudication to resolve construction disputes, particularly in respect of public sector construction contracts. Public officials responsible for administering construction contracts are hesitant to take decisions or deal with variations and claims when they arise. The adjudication procedure allows for these issues to be referred to an independent third party for a binding decision, providing a mechanism for dealing with change – albeit slightly delayed.

“During 2020, we saw a continuation of the trends apparent in MDA’s annual adjudication survey over the past few years. The most common disputes referred for adjudication referred to claims for extension of time and related costs, followed by claims for payment of outstanding moneys. Disputes involved an amount of less than R5m and most adjudicators were appointed by agreement between the parties,” says Massey.