Why Construction Arbitration is Complex? (III)

Building a warehouse is not the same as building a dam, a highway, or an underwater tunnel.

As I anticipated in the previous article, the complexity of construction contracts is due to the nature of their subject matter, the different types of contracts used in international contracting, the various forms of pricing, which influence the manner of their execution and the distribution of risks, and the influence of the fact that multiple related parties with diverse interests are involved.

In this article we will see why the scope of works of a construction contract is complex.

The purpose of a construction contract is the performance of work which is defined in a project, and which must be carried out in accordance with the conditions set out in the drawings and in the other contractual documents. Therefore, the purpose of the contract is the work itself, which may generally consist of building or civil engineering work.

The definition provided by the Spanish Public Sector Contracts Law is very useful, which states that a work is understood as "the result of a set of construction or civil engineering works, intended in itself to fulfill an economic or technical function, which has as its object a real property (...) or which modifies the form or substance of the land or the right to build on it, or improvement of the physical or natural environment" (art. 13.2).

It seems, therefore, that what is relevant is that the contract contains the agreement  on the works to be performed by the contractor and includes not only the end-product desired by the client, but also the procedures by which the contractor will achieve that result which, in some situations, may be understood to be included in the description of the works to be performed, even if not expressly mentioned.

“A project is a living thing that does not develop in an aseptic environment of a laboratory, but in reality, it is affected by multiple elements that can affect its execution.”

The complexity of a construction contract is linked to the particularity of the scope of the works, i.e. the work to be constructed. Regardless of the type of work to be executed, the construction activity is different from the activity of manufacturing other products in a factory or by industrial processes.

Generally, construction projects are executed outdoors subject to weather conditions, require a previous activity of individual and singular design and its execution, which can be developed over several years, requires planning and coordination of a great number of tasks and activities and demands the investment of large amounts of money.

Construction implies a modification of the existing physical reality that takes place on the ground -or in the subsoil or underwater or in the sea- and the contractor's activity is aimed at modifying that reality through the application of materials, the use of machinery and labor through an intellectual activity of engineering, design and construction.

The work to be executed may be a building intended for housing, hospitals, laboratories, offices, or sports and leisure facilities. It can also be large civil engineering infrastructure works such as a cable-stayed bridge, a tunnel built using complex tunnel boring machines, huge dams to form large reservoirs, highways, the construction of a dock in a seaport or a complex industrial plant, whether hydroelectric or for the extraction and refining of oil, gas or for the generation of renewable energy (solar or wind), the construction of power transmission lines or pipelines for the transport of water, gas or oil.

The construction of buildings and, above all, of large infrastructures involves the management and coordination of a large number of intertwined processes that must be managed efficiently. It must also be considered that the execution of these processes does not always take place consecutively, one after the other, as occurs in a factory production line, but may overlap or multiple tasks may have to be executed at the same time. In addition, there may be external elements, sometimes beyond the control of the parties, that may affect their execution.

I usually say that a project is a living thing that does not develop in an aseptic environment of a laboratory, but in reality, it is affected by multiple elements that can affect its execution. Think, for example, of the granting of licenses that depend on third parties, the weather or the actions of third parties that may affect the construction work and that may interfere in its execution in various ways.

We can add the fact that the reality of the land or space where it is being built may require changes in the design to adapt it to unforeseen needs or needs not considered at the time of drafting.

It is desirable that the more complex the construction work is, the greater definition of its scope is needed, to avoid future claims for lack of precision in the final product. If such precision is lacking, the client will always argue that certain omissions should be understood to be included because it is obvious and evident that they are inferred from the drawings and technical specifications or that it was the intention of the parties to include them.

The contractor, on the other hand, will argue that such omissions entitle him to have the scope of the project modified and to be paid for such additional work.

These factors make the definition of the works of a construction contract complex and the parties that negotiate it want to establish a distribution of the risks they face.

In addition, it is necessary to regulate the rights and obligations of the parties in this complex execution process, which adds to the complexity of the contract, since the greater or less complexity of the final product will determine whether the contract is more or less complex as more risks must be regulated.

To conclude this article, since we have already mentioned the risks of a construction contract, I bring here a description of the risks faced by a contractor in international contracting, which I liked, and which is even amusing for its completeness. It has been drafted by Philip L. Bruner, an American lawyer, arbitrator and construction mediator:

"International construction presents the greatest business risks (and presumably rewards) in the world. In undertaking to construct massive monuments to mankind's ingenuity in distant cities, jungles, desserts, mountains and seas, international contractors confront a multitude of risks: (1) management of multi-national parties; (2) language barriers to communication; (3) variations in the availability, productivity and skills of labor; (4) foreign customs and practices; (5) potential political and economic instability; (6) uncertainties of weather; (7) unexpected geological conditions; (8) extended lines of communication and supply; (9) differing quality and suitability of building materials; (10) currency fluctuations and restrictions; (11) unfamiliar forms of disease, plants, insects and animal life; (12) different civil and criminal laws; (13) possible arbitrary government regulation; and (12) difficulties in obtaining adjudication of claims and enforcement of contract rights."

In the next article I will continue to explore the complexity of construction contracts by analyzing the various types of contracts that are commonly used.

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