Why Construction Arbitration is Complex? (VI)

There are hidden parties in construction contracts. Be careful when drafting or analyzing a construction contract: there are hidden parties you must consider.

In this new article of the series on arbitration and construction contracts, I explore how the multiple parties involved —clients, contractors, subcontractors, project managers, engineers, suppliers, and more— create a web of legal relationships that can complicate any future dispute.

In this article I continue with the analysis of construction contracts to understand their complexity. An important aspect is to consider the multiple parties that are affected, generally as a consequence of other contracts related to the main construction contract.

The client, as we have already seen in another article, generally entrusts the draft of the project to technicians specializing in the type of work he wants to build, by means of a service provision contract.

The correct and complete definition of the project is of utmost importance because the contractor will then have to perform the work in accordance with it.

If it is incomplete or if it has deficiencies, it will be necessary to complete or modify it when the work is already in progress, which can generally mean higher costs for the client and delays in its execution.

The client also entrusts the technical management of the project to specialized professionals, who may be the same project designers or other different professionals.

Sometimes the client hires a project manager, who is a technician in charge of coordinating the execution of the work. This usually occurs when several contractors develop various phases or parts of the work, as we have already mentioned. In these cases, there are several contracts between the client and different contractors.

The contractor, on the other hand, usually subcontracts some parts of the execution of the works to specialized companies, for example, earthworks, specialized equipment such as, for example, bridge launching girders, formwork, specialists in various electrical or communications work, etc.

Sometimes subcontractors may subcontract part of their work to other companies.

The contractor also contracts the purchase of materials with various suppliers, materials that must arrive at the site in due time, according to the planning made by the project manager, to enable smooth and orderly development of the work.

The participation of all these parties creates a complex web of contracts and particular legal relationships that are generally governed by agreements and conditions that are very different from one another.

The different participation of each of these parties can influence, and in fact do influence, the course of the execution of the works, and can create conflicts (delays, deceleration of works, etc.) whose solution is not easy because the contracts that allow their participation are independent and there is no direct relationship between them.

Think, for example, of a delay by a subcontractor in the execution of a part of the work which, in turn, delays the execution of other work to be done later and, because of all this, the final completion date is compromised or impossible to meet.

The contractor is solely liable to the client, and the client will hold the contractor responsible for the delay, regardless of whether it was caused by a third party. The contractor cannot justify himself by blaming the subcontractor because the client has no legal relationship with him.

The same applies if the project is defective and some part of the project must be substantially modified. The contractor will ask the client to pay him for the cost overrun caused by such modification, as well as to extend the term of execution of the entire work while the project is being modified, but the contractor cannot take action against the designer because the latter has a contract exclusively with the client.

It may also be the case that a project is developed in phases, each of which is entrusted to a different contractor. Delays by a contractor in one phase may affect other contractors in other phases.

As we can see, the diversity of legal relationships that can occur and the different positions that the parties involved in the works have made a construction contract complex, because the multitude of legal relationships that are formed to make possible the achievement of a project are also complex.

Therefore, when there is a claim or a conflict between two parties to any of these contracts, it is very likely and frequent that parties to other related legal relationships are affected by that conflict or claim.

Thus, in the above example, if the contractor is penalized for the delay, it is most likely that this penalty will be passed on to the subcontractor who caused the delay and who could not be penalized directly by the client.

Finally, it must be considered that there may be other parties involved in a construction contract with different legal relationships that are affected by its development. This is the case of financing entities, parent companies that guarantee either the payment of the price or the execution of the work, entities that provide guarantees or insurance companies that insure some of the risks for some of the parties.

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