PPC2000 – Clients wanting their cake and eating it?

This article appeared in Construction Law in January 2007 and was written by Richard Dartnell, Solicitor, UK Construction & Engineering Group, Pinsent Masons .

When launched in 2000, the PPC2000 was the first standard form multi-party partnering contract. It was the direct result of the Egan Report "Rethinking Construction" and it embodied many of the principles recommended by the Latham Report for a modern construction contract. It has subsequently been adopted for use on a variety of projects in both the public and private sector but particularly for social housing schemes.  However before a "Constructor" signs up on these terms, there are a number of areas he should carefully consider. This article concentrates on five of these areas.

Multiparty Contract may lead to Multiparty Exposure

The PPC2000 is a multi-party contract and as such will be signed at the outset by the Client, the Client’s Representative, the Constructor and any Consultants and Specialists (sub-contractors) who may be in place. Further Consultants and Specialists may also join the contract at a later stage by signing a Joining Agreement.  With the exception of some Specialists, all parties enter the same agreement and form contractual relations with all the other parties to the agreement on the basis of the PPC2000 terms.

The effect of this multi-party structure is that each party to the contract will owe its contractual obligations to every other party to the contract. It also means that every party to the contract has the right to sue every other party.  A Constructor is therefore at risk of receiving claims in contract from more than one party in respect of the same circumstances – "double jeopardy".

So a Constructor causing a delay to completion of the Project who would expect to be liable to his Client might also find himself liable in contract to other parties if they can establish that they too have suffered loss as a result of the Constructor's default.  Without the contractual liability created by the multi-party approach, these other parties, e.g. professionals, would have found it very difficult to recover their economic loss from the Constructor in tort.

The 2003 update of the PPC2000 did not address this issue, so a concerned Constructor should be looking to include a provision dealing with duplicate claims and priority of claims. A Constructor who is settling any claims from a party to the contract should also try to ensure that the settlement binds all other potential claimants (or alternatively obtains agreement from the party with whom he is settling that the Constructor will be indemnified against any future claims from any other potential claimant arising out of the same circumstances).

Duty of Care in relation to Design

Clause 22 establishes a duty of “reasonable skill and care” for each Partnering Team member in the exercise of their respective roles, expertise and responsibilities.   To the extent that design (as identified in the Partnering Documents) falls within his "role, expertise and responsibility", the Constructor may be forgiven for assuming that this duty of care will apply to such design.  There are, however, further specific options relating to design responsibility set out at the front of the contract, which need to be carefully considered to assess what responsibility the Constructor is actually being asked to assume.

Option 1, which is the option most commonly chosen by Clients, places full responsibility on the Constructor for the design, supply, construction and completion of the Project “without prejudice to the duty of care of each Partnering Team member (other than the Client) to the Constructor”. In the event of a dispute in relation to design, this allows the Client to sue the Constructor, who would then need to sue any culpable Partnering Team member for breach of its duty of care to the Constructor under Clause 22. This is akin to the Constructor having a design and build role.  Quite apart from the question of whether such a role sits comfortably with the partnering ethos, it must also be realised that the Constructor has limited control over the design process in Clause 8 and it is the Client who selects the Consultants, agrees their services and has the power to issue instructions (e.g. Changes, Value Engineering). As such, a Constructor should be cautious of accepting this full D&B responsibility.

Option 2 places a fitness for purpose duty on the Constructor. Quite apart from the obvious difficulties that would present in obtaining professional indemnity insurance, should a Constructor ever agree to this where the Consultant's duty of care to the Constructor is only one of "reasonable skill and care" under Clause 22?

Option 3 is a net contribution clause on a "just and equitable" basis. This clause will require any claimant to sue all the relevant members of the Partnering Team who have contributed to a given loss – which will inevitably give rise to a multiplicity of proceedings and potentially very real difficulties of having to establish hypothetical contributions in circumstances where one party has gone bust.

Option 4 is a variant on a net contribution clause and is an attempt to pre-agree responsibility for loss or damage that has not yet arisen. This must surely give rise to insurance difficulties.

Option 5 is an open-ended invitation to amend the duty of care warranties as the parties see fit.

Design Process and Responsibility

Clause 8 sets out the design development procedures for both the pre and post Commencement Agreement phases, with the primary obligations falling on the Design Team and Lead Designer. Taken as a whole, the provisions should be of particular concern to a Constructor who has accepted full design responsibility or there is a fitness for purpose warranty.

Constructors should note that despite this being a partnering contract there are no express obligations on the Client to provide the Lead Designer and Design Team with all the information and assistance that they reasonably require in order to carry out the design. Nor is the Client expressly required to warrant the reliability of all the information provided pre and post tender upon which the Lead Designer and Design Team have relied.

Further, whilst various provisions in Clause 8 give the Client a right of approval over design development, Clause 8.11 allows the Constructor a right to object to a design only on the grounds that the "design is contrary to any Partnering Document or otherwise demonstrably not in the best interests of the Project". This may cause the Constructor difficulty where the design is not his but he carries responsibility for it, as might the provision which states that if the Lead Designer confirms or amends a particular design then the Constructor is bound to accept that confirmation or amendment. The Constructor has no veto and any implied relief through references to Clause 17 (Changes) and Clause 18 (Risk Management) is not clearly set out.

Unallocated Risks

Clause 18.2 also creates a potential headache for the Constructor as it provides that he is responsible for managing all project risks "except as otherwise stated in these Partnering Terms". Given that the project is likely to be complex with multiple parties and multiple obligations covering many different disciplines it may well be the case that the division of responsibility fails to cater for all eventualities.  In these circumstances the Constructor assumes the balance of risk not expressly provided for.

Imagine a relatively simple project where an architect is to design the structure of a building but a Specialist is to design and install the windows. The Client may then make a claim for losses resulting from defects in the design of the interface between the windows and the building structure – who is responsible for the interface between the windows and the building structure? In the absence of any express division of responsibility stated in the Partnering Terms, the effect of Clause 18.2 is that it will be the Constructor who assumes that responsibility.  He will be responsible for something that is not his fault - and that in a partnering contract!

Constructors should also be aware of Clause 21.2(ii) which obliges Constructors to rectify "any aspect of the Project …. not in accordance with the Partnering Documents". This could arguably include design defects of Consultants irrespective of whether such defect has been caused by the Constructor's failure to meet its duty of care.  Whilst the Constructor may have a cause of action against the Consultant, it is the Constructor who will have to go to the trouble and expense of pursuing the Consultant and the Constructor who will bear the risk of Consultant insolvency.

Supply Chain

The sub-contracting arrangements are found in Clause 10 and they allow the Client a very significant degree of control over the whole process whilst at the same time placing all of the risk of sub-contracting with the Constructor.

The default assumption is that the Constructor will appoint Specialists by way of sub-contract or will perform work internally through Direct Labour Packages. But before doing so, the Constructor must obtain approval from the Client by submitting a Business Case to the Client. If the Client approves the Business Case then the Constructor may proceed. But if the Client is not satisfied with the Business Case then he can require the Constructor to test that Business Case against market prices and the Constructor must tender the package to and select sub-contractors approved by the Client and on terms approved by the Client.

There is nothing new in requiring transparency but to retain an ability to dictate the sub-contracting structure and terms to the Constructor seems to undermine the Constructor's ability to properly manage the risks he is being asked to assume. If these requirements are to be retained at all, the Constructor could try to limit their application to particular works packages in respect of which the Client has project specific concerns.

Where a Specialist is making a significant contribution to the Project he may, but it is submitted should, be asked to sign a Joining Agreement and become a member of the Partnering Team. However, even this does not absolve the Constructor from liability for such Specialists as Clause 10.12 requires that (with the exception of Client appointed Specialists) the Constructor shall be responsible for all aspects of the performance by each Specialist of its responsibilities in relation to the Project.   Once again one must ask if this is really in keeping with the ethos of partnering which ought to involve risk sharing.

If we return to the example of who is responsible for the interface of the windows with the rest of a building, imagine that a Specialist appointed by the Constructor has been given that responsibility. In the event of a defect with how the windows interface with the rest of the building, the Constructor may be held liable to the Client for the Specialist's performance even though the windows interface was not the Constructor's responsibility. The effect is once again to place the Constructor into a design and build role and the risks that go with it and this does not seem within the spirit of partnering, particularly if the Client has had so much input into the appointment of the Specialists.

There also seems to be the potential for inconsistency where the net contribution option is used in Clause 22 and the Specialist is named in that option. If that Specialist was appointed by the Constructor and failed to carry out its obligations then would the Constructor have the protection of the net contribution option or would he still be liable under Clause 10.12 for the default of the Specialist? The Constructor may be able to rely on Clause 2.6 under which the net contribution option takes precedence, but the position is far from clear.

Conclusion

It is often very difficult to negotiate any amendments to the standard form particularly for Constructors working with public sector clients, but just because this is a "partnering" contract Constructors should not assume that everything will turn out OK in the end. The PPC2000 contains a number of areas that should be fully appreciated by Constructors before entering into the contract otherwise they could be in for a nasty surprise.  Whilst their Clients may wish to share the rewards of a successful project, they are not often so keen to share the risks that go with the territory of any construction contract.  This should be borne in mind and catered for accordingly either through negotiation and amendment, additional "project and risk management" or pricing, or a combination of all three.

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