Government's ACP contract laws involve wary path

PUBLISHED : Friday, 25 June, 1993, 12:00am
UPDATED : Friday, 25 June, 1993, 12:00am

POTENTIAL difficulties in documenting the complex contractual arrangements necessary to regulate the Airport Core Programme (ACP) contracts seem to be key factors behind the Hongkong Government's decision to engage independent lawyers to advise it on the form of contract it should use.

The result was the General Conditions of Contract for the Airport Core Programme Civil Engineering Works.

They are based on the Government's Civil Engineering Works Conditions, 1983 edition. The ACP Conditions are not a dramatic departure from previously accepted contractual practices.

The major changes that have been made reflect: Lawyers' concerns about the inadequacies common to standard forms of contracts; The introduction of a mechanism, lump sum work, for limiting the possibility of a change in the price the Government has to pay for a section of work.

Because of the nature of their work, lawyers tend to be primarily concerned with claims - claims for extensions of time, prolongation costs, the correct valuation of variations and the like.

When we are asked to draft conditions (which is still uncommon in Hongkong), we aim to ensure that provisions for notifying and recording claims are adequate.

The ACP conditions include new and comprehensive provisions for doing this: see Clause 16, (Programme and Progress Reports), Clause 69 (Claims) and Clause 70 (Maintenance of Records).

I favour the introduction of these provisions. If operated properly, they should assist a contractor in verifying his claims. But there is a risk in the introduction of these types of sophisticated provisions.

If the contractor does not comply with them, he loses his right to whatever it was he was intending to claim for. It is sometimes argued that, as a result, the contractor is forced to spend too much time and effort dealing with claims, and this is not aconstructive use of his time.

I do not find this a convincing argument, if the contractors are only likely to benefit from the discipline the ACP conditions impose on them to notify and document claims thoroughly. The most common form of contracts allows for the re-measurement of all, or nearly all, work.

This is not the case in the ACP Conditions. Clause 67 provides that the Pricing Documents will identify re-measurement items, or adjustment items, as the founder also referred to. The remainder of the work described in the Pricing Documents involves lump sum items and their price will only be adjusted if a variation is ordered pursuant to Clause 66 of the ACP conditions.

Lump sums were introduced much to the chagrin of contractors.

Their concerns arise primarily because they feel it is unrealistic: To expect contractors to check the accuracy of Pricing Documents during tenders; For contractors to price the risk of inaccuracies in the Pricing Documents.

Lump sum items are intended to give the protection of price certainty to developers.

Price uncertainty exists because it is inherently difficult to assess before a project is started exactly what work will be required.

Although one can readily see the attractions to a developer of this allocated risk, I have never understood why it makes commercial sense that a contractor should bear the risk of unforseen events.

In practise, the introduction of lump sums may not limit price changes in respect of the work they cover. There will, inevitably, be changes required by the Government, which will have price effects and contractors can still make claims, for example, forcompensation for disturbance pursuant to Clause 68 of the ACP conditions.

It appears as the ACP conditions are becoming more fully understood, contractors' initial concerns about them are being reduced as they realise they are not stuck with a fixed price regardless of how the work develops during the course of a contract.

What still causes considerable concern is the absence of fluctuation provisions.

In this respect, all work, not just lump sum items, is fixed in price. In an economy with a high general inflation and high prospective demands for resources in the construction industry, the potential for contractors to find that they have substantiallyunderestimated cost escalation is considerable.

Jonathan Harris is a partner with the law offices of Bateson Harris in Association with Mallesons Stephen Jaques. He has helped developers and contractors in Hongkong for 10 years on building and civil engineering contracts.